The Magic of Compound Interest!
In some of my previous articles, I covered the subject of student loans and how they follow you around for just about the entire second half of your life after college.
I’ve also written about the impact that student loan debt has on people.
In today’s article, I am going to cover a subject that has everything to do with Magistree’s student insurance plan and is a big part of why Magistree is one of the best ways to save up for college – compound interest.
But before I dive into it, I wanted to talk briefly about the opposite of compound interest – debt interest.
1 in every 8 Americans has a student loan debt. The next time you walk down a busy street, or inside a shopping center, look around you and count how many people you see in a one-minute window. That’s a lot of people walking around with the burden of a student loan.
The average federal student loan is $36,510. That figure doesn’t consider private student loans, which average at $54,921.
Think about what you could buy with $36,000 or $54,000. That’s a lot of money to have as a debt before you’ve ever even started a career.
Now, the average term of a student loan is 20 years. Some take loans up to 45 years, but let’s go with the average for the sake of this calculation.
The average interest rate for a student loan (as of 2021) is 4.66% for an undergraduate. Again, I am going to use this lower average, because rates actually can get higher depending on if you take out more loans to do further schooling. The average interest rate for a graduate is 6.22% and for parents or adults its over 7.20%.
But for the sake of the example I am about to give, I will use all the lowest averages.
A $36,510 student loan, on a 20 years term, with a 4.66% interest rate.
By the time you are done paying your student loan off, you will have paid $56,195.
That’s almost DOUBLE what you borrowed. That’s called debt interest.
If you want to make a similar calculation with your own figures, I found a great online student loan calculator that will help you:
CLICK HERE TO CALCULATE YOUR STUDENT LOAN PAYMENTS
The entire concept of Magistree’s insurance plans is to capitalize on compound interest, consistent savings, and crowdfunding to help save up for education so that you don’t nor you children will need to take out a student loan.
So let’s take a look at the magic of compound interest.
What is Compound Interest?
Compound interest is the addition of interest to the principal sum of an investment or savings plan. In other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
It sounds simple but over time it adds up incredibly. In fact, its so incredible that Albert Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
How Does Compound Interest Work?
The money you save either in a savings account, an insurance plan, or investment, earns interest. You earn interest on the money you originally save, plus on the interest that you’ve newly accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.
When I tell you that the average federal student loan is $36,510 that might sound like a lot of money. You might be asking yourself, “how can I put away that much money in such a short period of time?”, or maybe you think it’s too late.
No it’s not too late!
Here is why I’m telling you compound interest is MAGIC and why Einstein called it the 8th wonder of the world.
Let’s say you wanted to save up for your children’s college and you start putting money aside when they are 8 years old. That gives you 10 years to set aside money.
If you had an annual interest rate of 7%, which is about the average interest rate of an investment over time.
And if you put away just $200 each month for those 10 years.
After 10 years, with compound interest, you would have saved up $35,480. That’s about the average you will need to pay for your children’s college.
Yes, that’s the magic of compound interest and that is what Magistree helps you with.
If you start saving $200 a month when your child is 1, and you save money for 17 years with a 7% interest rate (using compound interest) you will have $79,197 by the time your child is 18! That’s enough money for college, paying for a car outright (novel idea right?!), and a decent downpayment on an apartment when he/she finishes college.