Wednesday, January 11, 2006

So you thought credit cards were free money?

Well I sure if you are interested in personal finance you have learned by now that credit cards are not in any way free money. If you are a college student you are likely paying at least 20% interest on your credit card. That means if you have $2000 racked up on your card you are paying $400 a year on that credit, or you paid $60 for that $50 pair of jeans you bought a year ago and you haven't paid off yet. Now that doesn't seem too bad does it, I mean $10 over a year is only 2.8 cents a day right?

Well think for a moment what would have happened if instead of paying $400 in interest last you you invested it in an index fund? (A list of great index funds can be found here) If you earned a conservative 8 percent on that money you would have $432. Again $432 dollars doesn't seem like much, but the next year you would have $456.84, then $493.39, then $532.86. In 8 years you will have doubled your investment! Or instead you could just use your credit card with 20% interest and double the amount you owe every 3.8 years. So in 4 years you could end up with -$800 instead of -$400 or in 8 years you could end up with $800 instead of $400...you decide!

Pay off your freakin credit cards and invest!

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