Utilise compounding interest as best you can. Compounding interest, I’ll let Albert Einstein explain it: “Compound interestis the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
A key to managing your debt effectively is being able to utilise compound interest to help massively reduce the amount of interest you pay.
Here is a table showing interest rates and how long it takes to double your money:
| Interest Rate | Years to Double |
| 10.0 | 7.2 |
| 9.0 | 8.0 |
| 8.0 | 9.0 |
| 7.0 | 10.3 |
| 6.0 | 12.0 |
| 5.0 | 14.4 |
| 4.0 | 18.0 |
| 3.5 | 20.6 |
| 3.0 | 24.0 |
| 2.0 | 36.0 |
| 1.0 | 72.0 |
7%, which is typically what mortgage rates tend to average at, doubles your money in just over 10 years. Savings rates are more likely to sit around the 5% mark so your money doubles in 14.4 years, however, this interest is taxed so at 30% tax rate your real interest is only going to be 3.5 % which takes 20.6 years to double your money.
While you cannot ‘earn’ interest with a mortgage you can certainly save it and every cent counts, especially if you can leave it sitting there.
The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.
