source article: A Teachable Moment
“Compound interest is the eighth wonder of the world…He who understands it earns it…He who doesn’t, pays it.” – Albert Einstein
Reverse compound interest is the most financially devastating force in the universe.
We are speaking of credit card debt. This over $1 trillion time-bomb has Americans paying interest rates that can range from 20%-30%. This is a big reason why so many are barely keeping their heads above financial water.
So many people lack the cash to pay a surprise bill and also have a grand total of ZERO saved for retirement. Did you know folded a piece of paper in half fifty times that would create a thickness of over 60 million miles! This is the power of compounding. OK, most debt doesn't compound at 100% but it's nice to be aware.
Unfortunately, this miracle of compounding can turn into a nightmare, when interest charges accumulate and get added on to the bill.
It is a terrible idea to borrow money to buy something that would lose value the moment you took possession of it. In other words, that special deal where a flat screen T.V. could be bought for “only $20 a month” may not be that special after all.
Imagine it is the summer holidays. You would love to go on a trip to Chile with your friends and don’t have the cash but you do have a Visa card with a $10,000 limit. You decide to go for it. At the end of the month, you realise there was a direct connection between your alcohol consumption and spending. The bill arrives and you owe $10 grand!
After vomiting, you determine you can only make the minimum payment if you want to keep up with your “cool” lifestyle. If you just made the minimum payment, according to the credit card company’s formula, at a 20% interest rate it would take 20 years to pay this bill!
In addition, you would spend more on interest payments than you did on this entire trip!
In the end you would have nothing to show for this adventure, except for maybe that intestinal parasite that is still giving you problems.
It is a great idea to know about the dangers of becoming a slave to debt. Spread the gospel of both the extreme pleasure and pain that compound interest can bring.
In my mind there are few more important lessons than this.
In the words of Robert Breault, “If you understand compound interest, you basically understand the universe.”
Who would have thought the first step to becoming Master of the Universe would be to understand how to properly use a credit card?