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Pov was a teenager who felt a lot of pressure to fit in with his friends. All of his friends had recently bought new motorcycles, and Pov felt like he needed to do the same in order to be cool. However, Pov didn't have the money saved up to buy a new motorcycle outright, so he decided to take out a loan.
The loan had an 18% annual interest rate, which meant that Pov would have to pay a lot of money in interest over the life of the loan. Despite this, Pov felt like he had no other choice if he wanted to keep up with his friends.
The payment structure for a loan of $2500 at an 18% interest rate over 36 months would consist of 36 equal monthly payments of approximately $86 each.
A few years later, Pov ran into his old friend Piseth. He had also wanted to buy a new motorcycle but decided to save up for it instead of taking out a loan. He had put the same amount of money that Pov was paying each month towards his loan into a savings account with a 7% annual interest rate.
When they compared their situations, Pov realized that he had made a mistake by taking out the loan. He had ended up paying a lot more money in interest than Piseth had earned in interest, and he still had a long time left to pay off the loan. Piseth, on the other hand, had been able to save up enough money to buy a new motorcycle outright and had even earned some interest on his savings.
Pov took a loan of $2500 with an 18% interest rate and paid it off after 3 years. Therefore, Pov paid a total of $1350 in interest over the 3-year period to repay his loan of $2500. In only 3 years he paid $3850 to the bank. And after 36 months of paying $86 each month, he now has $0 in his savings account.
Piseth has approximately $3783 in his bank account, considering both his savings and the compound interest earned. Now Piseth buys his dream motorcycle. He continues to save $86 every month to buy something nice for himself in the future.
Pov felt frustrated and regretful, but he also learned an important lesson about the importance of saving money and avoiding debt. He realized that he had been too focused on fitting in with his friends and hadn't thought about the long-term consequences of his decision.
From that day forward, Pov made a commitment to be more mindful with his money. He started tracking his expenses, creating a budget, and saving money every month. Although it wasn't easy, Pov was determined to become financially stable and avoid making the same mistake twice.
