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The Money Mentor: The Mythos of Money

This is Part 9 of the series to serialize my book The Money Mentor: A Tale of Finding Financial Freedom. Click here to start reading from Part 1. Every other week will have another segment of the story of how a 23-year-old dancer struggles with and ultimately overcomes the burdens of her crushing financial debt. Look for posts on a variety of topics in the intervening weeks.

I was feeling pretty bad at this point, not just from the pain in my mouth but also from the realization that I was a fool who paid a lot more interest than I ever imagined—especially since I’d never given it a single thought, much less a second thought—and, worst of all, that I saw no way out of it. In fact, I wasn’t really sure what I owed. I knew roughly what my minimum payments on all of the cards totaled each month, but I had never thought to add up the principal. Or maybe I had thought of it but didn’t want to know.

“I’ll tell you something else about credit cards,” he went on, “People spend a lot more money using credit cards than using cash. It’s crazy, because after all, our money is worthless paper. If you take a Federal Reserve Note to be exchanged, they’ll give you another Federal Reserve Note—not gold and silver, the way they used to. So it’s our trust that gives the money value, our willingness to accept it. But we’re more reluctant to part with paper money than we are to run up a tab on a credit card. Maybe the fact you get the credit card back, but not the money, makes some difference. I don’t pretend to be a psychologist, but it’s another reason why using credit cards can be so risky. Not only are you going into debt, but you’re going into debt faster than if you didn’t use the credit cards. It makes me wonder what will happen when we’re all buying stuff on the Internet, using invisible digital money. I’ll bet people spend a lot more that way than they would if they had to hand over real money.”

I knew he was right, although I couldn’t explain why paying with paper money should seem more solemn and real than paying with a credit card. I was glad that the fifth credit card had something left to draw on its credit line, but suddenly I felt afraid about the future. Maybe I’d get a new credit card with a fresh line of credit, but somehow I didn’t think so. The last application I sent in had been turned down. Even if I could get another card, I was suddenly wondering where it would all end.

The Money Mentor: A Tale of Finding Financial Freedom

If you don’t want to wait two weeks for the next post in this series, you can purchase The Money Mentor on Amazon.

March 30, 2016 0 Comments

The Money Mentor: The Timeline of Compound Interest

This is Part 8 of the series to serialize my book The Money Mentor: A Tale of Finding Financial Freedom. Click here to start reading from Part 1. Every other week will have another segment of the story of how a 23-year-old dancer struggles with and ultimately overcomes the burdens of her crushing financial debt. Look for posts on a variety of topics in the intervening weeks.

“Do you know how long it takes to pay back two thousand dollars on a credit card if you pay the minimum each month? Assume 19.6 percent interest, although some cards offer a little less than that.”

I’m not terrible at math. In fact, music is kind of mathematical and you need a feeling for music in order to be able to dance. But I couldn’t fathom what the minimum payment would be if you owed two thousand dollars. Just guessing, I thought maybe it would take two or three years to pay it all back.

Fortunately, I couldn’t say anything.

When I didn’t answer, he triumphantly supplied, “Twenty-two years. I bet you never imagined that.”

“Uh-uh,” I had to agree.

“How much in total would you have to pay back for the two thousand plus interest?”

Twenty-five hundred, maybe even three thousand, occurred to me, but I didn’t really know.

“Four thousand nine hundred and nineteen dollars,” he proudly answered himself. “That’s two thousand nine hundred and nineteen dollars in interest for a two-thousand-dollar loan. And it’s not usury, it’s perfectly legal. Rinse. Now how can you explain why people are willing to pay so much interest? Why do people pay 15–20 percent on credit cards when they can only get 3–4 percent interest on savings deposits and no one else pays as much interest—not for car loans, mortgages, business loans, or anything else that doesn’t involve a loan shark?”

I leaned forward to rinse out my mouth, then answered with the first word that came to mind and certainly seemed to apply in my case.

“Stupidity?”

“As P. T. Barnum said, ‘There’s a sucker born every minute.’ Open wide. In fact, many people who pay interest on their credit cards think they don’t. They deny the reality of what’s going on. Or maybe they plan to pay it off, so they hope that soon they won’t be paying more interest. Or they know they pay some interest, but don’t realize how high the rates are. After all, where in our educational system are the most basic aspects of personal finance taught? Nowhere, so rather than saying people are foolish, maybe we should say we have a foolish educational system. If we don’t teach about the problems, we certainly can’t teach about the solutions to those problems.”

The Money Mentor: A Tale of Finding Financial Freedom

If you don’t want to wait two weeks for the next post in this series, you can purchase The Money Mentor on Amazon.

March 16, 2016 0 Comments

The Money Mentor: A Math Quiz and Compound Interest

This is Part 7 of the series to serialize my book The Money Mentor: A Tale of Finding Financial Freedom. Click here to start reading from Part 1. Every other week will have another segment of the story of how a 23-year-old dancer struggles with and ultimately overcomes the burdens of her crushing financial debt. Look for posts on a variety of topics in the intervening weeks.

“If you have one thousand dollars in a savings account that pays five percent interest, how much would you earn in a year?”

Fifty dollars seemed like the right answer to me, but I couldn’t pronounce it and simply opened my eyes wide as if to shrug.

“Give up? Well, it’s a trick question. Whatever you answer, I can say you’re wrong and prove it. Open wide. For example, what if you answer ‘fifty dollars’? Most people probably would. That would be the right answer if interest were paid once a year. On the other hand, if interest were paid quarterly, the interest for the year would be more than fifty dollars, and if interest were computed daily, you’d earn even more than if it were computed quarterly. It’s because you’re earning interest on interest. That’s what compound interest is all about.

“Wider please,” his thick finger pressed my lower lip painfully against an incisor. “So what does all this mean?”

I was wondering myself, because a few pennies one way or another didn’t seem to make much difference to me.

“Compound interest can work for you or against you. I’d say that, in your case, it’s working against you.”

I would have liked to interrupt him, because I have some selfesteem issues that didn’t appear on his radar screen, but of course, I had to keep as silent as if I had taken a vow.

“How does somebody max out a credit card anyway? On not just one credit card, but four?”

I would have liked to tell him. Maybe if he understood what had happened, he wouldn’t be so smug. It had to do with being offered a lot of credit cards in my junior and senior years in college and accepting all of them. After all, I didn’t have to have income or get a parent to guarantee that payment would be made. And I honestly believed that the credit card companies had big computers that know whether or not you can handle three, seven, or twelve credit cards. They probably had a pretty good idea how much I would be earning after college—a lot better idea than I had, since I had no idea at all—and if those big companies thought it would be enough to pay them back, on top of my college loans, then what could be wrong with accepting the cards?

“It’s really simple,” he went on. “Cards get maxed out because people believe that paying the monthly minimum is enough. That’s just what the credit card companies want them to believe. But if you pay the monthly minimum, you are paying a whole lot of interest. After the first month, you’re paying interest on interest. Open wide.”

The Money Mentor: A Tale of Finding Financial Freedom

If you don’t want to wait two weeks for the next post in this series, you can purchase The Money Mentor on Amazon.

March 2, 2016 0 Comments