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.
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.