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Interest You Earn vs. Interest You Lose

    Most of us are well aware of the interest we are earning or not earning in the money we have invested. What little time we spend thinking about how our money is doing is usually all spent on what is our rate of return, how much interest am I earning.

    There is another type of interest you may want to pay attention to and that is the interest you may be losing. There is interest paid when you finance a car, buy things on your credit card, pay your mortgage, borrow for college student loans, and all kinds of personal loans.

    Remember the economic term called opportunity cost. If you pay out a dollar you did not have to pay, you not only lost the dollar, you lost what that dollar could have earned for you had you kept it and not paid it out. The higher your potential rate of return on your investment, the higher the opportunity cost associated with interest lost. If you are earning 6% in an investment, and you are paying interest to someone else, your opportunity cost lost is the interest at 6%, not just the interest. If you are earning 8%, your opportunity cost lost from interest you are paying would be 8%.

    It makes little sense if it can be avoided, to be investing which often requires you taking risk, so that you can earn interest in your left pocket while at the same time buying things that require you to pay interest out of your right pocket.

    Have you ever heard of the diet soda and jelly donut strategy? It does not work physically or financially. You must pay just as much attention to the interest you are losing as you are to the interest you are earning. If you need help eliminating the areas where you are losing interest, give us a call.