Things every young person needs to know about money - Chapter 6 – Compounding can be your enemy
“Credit card interest payments are the dumbest money of all.” Hill Harper
“Procrastination is like a credit card. It’s a lot of fun until you get the bill.” Christopher Parker
The interest clock never stops running and compound interest can work against you.
My dad taught me that when I borrowed money for the first time. I was 17 and wanted to buy my first car, so he took me to his bank and helped me with the loan process. He explained that the clock starts “running”, meaning that interest was accruing, the moment I signed the loan paperwork. The interest would continue to accumulate until I paid back that last dollar. Every minute of every day I would owe a little more money to the bank.
Wow. I had never thought of interest like that before! I knew what interest was because we learned the concept in school, but I had never had it personalized like that. I seriously considered not buying the car. But I was young and it was a cool car! So I signed the paperwork.
I have had that same discussion with all my girls. Everyone needs to know how money and interest work.
Apply that same logic to credit cards. If you don’t pay off your credit card every month, the interest clock runs against you with every purchase! Every Starbuck’s coffee you drink, every meal at a restaurant, and every time you fill up your gas tank the interest clock is putting you a little deeper in debt.
The credit card companies are very upfront about this. On every monthly statement they explain the profound impact of this accrued interest on your ability to get out of debt. I reviewed a recent statement (I use credit cards strategically for “points” and other perks, but pay them off every month so I don’t pay interest) and found this information:
If I pay the minimum payment, it will take 19 years to pay the card off, and I will pay $17,000 in total! For some perspective that is double the statement amount. If I pay $292 a month (roughly $100 more than the minimum), the card will be paid off in 3 years and I will pay “only” $10,000.
Credit needs to be used strategically and all interest is not equal. If you can borrow money to purchase real property or an appreciating asset, you should borrow all you can! At today’s low interest rate, it makes perfect sense to use as much of other people’s money as they will give you. However, if you are borrowing money from a credit card company at a high interest rate to purchase meals or depreciating assets, you are on the wrong side of the compounding equation.
Last year I did a series on "cancel culture". I shared the experience that several friends and I had dealing with unscrupulous people trying to advance their positions by abusing a non profit organization. If you want to read that series, it starts here: https://www.projectmanagementforum.net/post/my-experience-with-cancel-culture-part-1-background
I made several predictions about what would occur after we left, and those predictions have proven to be true. If you have virtueless people in charge, the organization is doomed. Every time.