Rich People Earn Interest, Broke People Pay Interest

Interest is a funny thing. And powerful. It can work for you or, in the majority of Americans, work against you. I had a college professor once say, “Rich people earn interest, broke people pay interest.” That’s kind of harsh. But for much of my adult life, it turned out to be true. I may not have been poor (by society’s standards) but I was broke.

If you have a lot of debt and not a lot of interest earning accounts (savings, cds, stocks, mutual funds), then you need to start reversing that trend. Make a bar graph, with Excel or similar computer generated chart, or with poster board. Every month, or every quarter (no longer than that), make a two-columned bar. One column is the balance of all you are paying interest on: loans, credit cards, mortgages. And one column for the balances of all you are earning interest from: mutual funds, savings, 401ks, stocks. (*technically mutual funds and stocks don’t earn interest, but for this exercise we can include them) Your goal, initially, is for each month to bring these two bars closer together until ultimately the interest being paid is smaller than the interest being earned.

Each month should come closer together. If you have a bad month, a TRUE emergency happens where you’ve had to dip into savings or use a credit card, you have to immediately get back on track. Once your interest earned bar tops the interest paid bar, do not slow down. This is a time to celebrate but don’t lose your momentum. Remember the ultimate goal should be to not have any debt. All of your money should be going to earn more money. So, your homework for this week is to get your information together and start your bar graph.