Double Trouble
When I was eight, I wanted a toy and needed $10 to buy it. But, as usual, I was broken. I decided to ask my 11-year-old sister, Kathleen, for a loan. I went to her room1her for the cash. Laughing, she agreed to2me the money, but added, “I will charge you 10 percent compound interest every 3until you pay me back.”
“Compound interest what's that?” I asked.
“Well, interest is what you call the4money borrowers have to pay back on a loan,” she explained. “Compound interest means that the interest payments get bigger and bigger the5you take to pay back the loan. To repay the loan, you will need to give me $11 after one month. If you wait two months to pay me back, your6will grow from $10 to $11. So I'll be charging you interest on $11. Then I will add that interest to the $11 you already owe me, for a 7of $12.10. That's what you'll owe after two months.”
“Sure. I get it,” I said. Though truthfully, I was getting 8
Kathleen lent me the money, and I bought the toy. My birthday came a month later, and my mom gave me $10.9that was just the amount I needed to buy another toy I wanted10I put off paying my sister for a month. After another month, I11about the loan.
Several months later, on Christmas morning, my sister and I each found a $02 bill in our stockings. I was just putting it into my pocket 12Kathleen tapped me on the shoulder.
“Sorry, kiddo. That's mine. I'm13on your debt.”
“Huh?” Then I remembered the loan. “Hey! How can it be that much? I 14borrowed $10.”
“True,” she said, “but interest has been compounding for eight months. Now you 15me $21.43.” She paused, then added. “You can pay me the $1.43.”
I 16to believe that a $10 loan could more than double so quickly. Much to my17my sister got her pencil and tablet and showed me exactly how it all added up.
My head18as I tried to keep track of Kathleen's 19 but this time, I got the basic idea of compound interest. I 20the hard way that borrowing money can be “double trouble” in no time.
