Final answer:
The statement is false. Compound interest benefits savers and is detrimental to those in debt. Paying off high-interest debt can save more money than earning low interest on savings, and savings behavior can vary regardless of interest rates.
Step-by-step explanation:
The statement 'Compound interest is good if you have debt, bad if you have savings' is false. Compound interest favors the party that receives the interest. If you have savings, compound interest works in your favor, making your savings grow over time. On the other hand, if you have debt, compound interest can significantly increase the amount you owe, especially if the debt is not paid off promptly.
Consider the example of a person who has a credit card debt of $1,000 with a 15% yearly interest rate, and a savings account with a balance of $2,000 that earns 2% per year. This individual would pay $150 a year in credit card interest but only earn $40 in savings interest, leading to a net loss of $110 annually. Paying off debt, especially high-interest debt like credit cards, can save money on interest and is usually a wiser financial decision than holding equivalent sums in low-interest savings.
As a general rule, it’s not safe to assume that a lower interest rate will lead to lower financial savings for everyone. While lower interest rates can reduce the incentive to save in some cases, individuals may save for various reasons, such as security, future purchases, or retirement, regardless of the interest rates.