(and I would think, “uh, that’s not how it works.”)
That question told me two things:
1. Most people do not know that all banks and most investors are ‘debt buyers’ one way or another.
2. Most people don’t understand that the monthly interest they pay on credit cards, car loans, and mortgages all form someone else’s “yield” on an investment. Up until about 30 years ago that someone else would have been their bank, but in recent decades their interest yield typically goes to the investor in an asset-backed bond.
I passionately believe that understanding the math of compound interest will help you think like a bank or investor.
In either case, more people should understand – for personal finance reasons – the connection between the interest they pay and the growth of someone else’s money. Because if you reverse the order – if you yourself become the lender or investor of capital – then you get to earn the compound return available from someone else’s interest payments.
Understanding the compound interest formula – which shows the growth of money today into larger amounts of money in the future – helps provide the mathematical insight into this idea of debt interest = yield.
My short video on this subject:
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