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