FUN & GAMES WITH INTEREST RATES

By John Ingrisano

By John Ingrisano

Director, Family Finance Conference Center

Ben Franklin was cited as saying:  “Watch the pennies and the dollars will take care of themselves.”  In the same respect, minor differences in interest rates can make big differences over time.

Example: If you ring up a $1,000 bill on one credit card and the annual interest rate is 3.9 %, but 15% on another, you will end up paying $21.25 in interest in one year on the 3.9% card, but $83.10 on the 15% card. So, unless you plan to pay off your card each month, the interest rate does make a difference.

Now let’s look at how the interest rate you EARN makes a difference over time.  Let’s say you deposit $5,000 a year into your IRA at the start of each year and your spouse also does the same.  One of you earns a fixed rate of 2.3%.  The other, which pays a variable rate based on investments, averages 8% over time.  

If you keep depositing $5,000 annually into each account for 40 years, the one account earning 2.3% will have grown to $342,285.  The IRA averaging 8%, over that same period of time, will grow to $1,507,527.81.  That’s a $1.2 million difference.  

The bottom line:  The interest rate does matter … BIG TIME!  When selecting a credit card, make sure you push for the lowest rate possible, and if you must borrow, look for those special deep-discount deals.  And when it comes to retirement, decide how much you intend to balance the safety, guarantees and security of a low, locked-in rate versus the opportunity of a variable rate, which could grow well … but which could also lose money.