The Sunday Mail
Compound interest can make the cash you invest or deposit into an interest-bearing account grow — and it can also make your credit card balance tough to pay down. It works by calculating interest on the initial principle balance and then on subsequent accumulated interest.
When it works to your advantage, compound interest grows the money you invest or deposit into an account, and compounds the interest you earn on it to increase the total account value over time.
On the flip side, when compound interest works against you, it can increase the balance on a loan or credit card that’s subject to compound interest rate charges (which may be calculated daily, monthly, semi-annually or annually).
Fixed interest rate v. Variable interest rate
A fixed interest rate typically won’t change, unless you miss a payment due date or otherwise fail to meet the terms of a loan or credit account (known as a penalty APR). There may be some circumstances when a fixed interest rate can increase, but only after you receive notice and an opportunity to opt-out of the increase.
Variable interest rates are based on a benchmark typically tied to a market interest rate. As that benchmark increased or decreases, the variable interest rate adjusts accordingly. An increase to your variable interest rate could push monthly loan payments higher than you can afford, and make loans more costly than you intend. In home financing, variable interest rate loans are sometimes called adjustable rate mortgages, or ARM loans.
Add what you own and subtract what you owe to arrive at your net worth. Your net worth can help you determine whether you’ve saved adequately relative to your debt, identify if you’re overexposed to any one asset class (like real estate) and measure financial progress throughout your life.
Investment or retirement strategies use asset allocation to diversify the investments you own; the goal is to improve your chances of earning maximum returns, while managing the degree of risk you take on in the process. Your ideal asset allocation will change throughout your financial life — based on any number of factors, including the global economy, the amount of money you have to invest, your specific financial goals and how long you have to reach them.