Interest is simply the cost of using someone else's money—or the reward for letting someone use yours.
Two Sides of Interest
When YOU Earn Interest
When you put money in a , the bank pays you interest. Why? Because they're using your money to make loans to other people. Your reward for letting them use it is interest.
When YOU Pay Interest
When you borrow money (like with a or car loan), you pay interest to the lender. It's the price of borrowing.
Why This Matters
Here's the key insight: interest can either build your wealth or drain it.
- Money in a earning 5% is working FOR you
- Credit card debt at 24% is working AGAINST you
The difference is massive over time thanks to .
A Simple Example
Earning interest: Put $1,000 in a savings account at 5% APY. After one year, you have $1,050. You earned $50 for doing nothing.
Paying interest: Carry a $1,000 balance at 24% APR. After one year, you owe $1,240. You paid $240 for the privilege of borrowing.
The Bottom Line
Your goal should be to:
- Earn as much interest as possible on your savings
- Pay as little interest as possible on debt
- Understand how magnifies both
This simple principle underlies almost everything in personal finance.