Think about this.
You have $5 million available for investment.
You put that money in an Index ETF that returns 2.5% annual dividend (not a demanding return).
What will that give?
You will get an average of $10k a month of dividend.
Not bad huh?
I didn’t understand the practical implication of interest rate when I was young.
Yes, I know the term ‘interest rate’ in theory, and I know how to calculate compound interest from one of the modules I studied in school.
But it was just in theory.
In business, it is common to take a bank loan with a 5% interest.
I did that in my wholesale business.
I borrowed $50k, paying about $200 of interest every month.
That’s not much right?
That’s what I thought at that time. But now I have a different view of it.
If I borrowed $50k at 5% interest a year, I would have paid $50k of interest after 20 years!
Bear in mind that time flies.
Once you take up a loan and start paying the interest, you will become ‘comfortable’ with it.
Unknowingly, you would have paid a lot of interest, yet you still owe the bank a lot of money!
A Simple Way To See Interest Rate
I have a simple way to see the ‘true color’ of interest rate.
Instead of looking at the interest rate, you look at the number of years the loan will be doubled.
For example,
With 5% interest rate, it takes 20 years to double the loan.
With 4%, it takes 25 years.
With 25%, it takes 5 years!
I pick 5%, 4% and 25% because these are the common interest rates.
Most business loan interest is 5%, balance transfer interest is about 4% and credit card interest is about 25%.
So, instead of looking at what is the monthly payment i.e. installment, I will look at how long it will take for me to pay double the money.
Then the next question is, is it worth it?
If the answer is no, then I will not take up the loan.
If you have taken a loan, make it an effort to pay back the money as soon as possible and not be comfortable with paying just the installment or interest.
