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Let us say you are 25 years old and you have P 100,000.00 in the bank today, and let it stay there, when do you think will your money double?
At 2% a year interest it will double to P200,000.00 after 36 years, when you reach 61 year old.
At 6% per annum, it will double after 12 years.
How did I know that? by using the Rule of 72. Developed by no less than the Genius Einstein. This is the number you use to determine how compounding happens. By dividing any number representing interest rate with 72.
Example. Bank Time Deposit interest rate is 12% per year
Compute: 72/12=6
Meaning with that interest rate, Your Time Deposit doubles every Six (6) years.
Now, what does that have to do with using a credit card? Well, computing earned interest is the same way with computing debt interest.
If your credit card charges 3% per MONTH, thats (3% x 12 months) = 36% annual interest on your outstanding debt.
If you have an outstanding debt that is left unpaid with 36% interest per annum of say
P50,000.00, then:
72/36 = 2
meaning your P50,000.00 will be P100,000 after two (2) years (granting you are 25 years old, then you owe P100k at 27) that means it will be:
P200K at 29 y.o
P400K at 31 y.o
P800K at 33 y.o (Gee..now you know why the tallest buildings in Makati are owned by Banks. PEACE!)
this can be a reminder that we should use Credit Card sensibly.
Credit Cards are meant to be for Convenience and safety, so use it as if you already have the Cash to buy what you want, but using Credit Card instead so you can revolve your money for the next 45 days before actually paying what you bought in full.
This explains why a lot of employees, seems to feel that their salaries are going no where even after 15, 20 years of working. Its because, Salaries increase only at say 10% a year, while debt increases at 46% a year. How can anyone catch up with that?
So, think twice before using your credit card on your next major purchase.