The Dark Side of Compound Interest

By |2021-12-03T08:21:43+00:00December 3rd, 2021|Investing|

Compound interest is a true miracle or a true disaster; it all depends

Ben is an elderly man living independently, subsiding on a below poverty income. Ben and his siblings have been continually active for years in our small town in Northern California. Ben helps at his church and helps his neighbors and community, always one of the first to volunteer.

Ben had been a substitute teacher, a farm laborer, and a shopkeeper. He never made much money; when his sister was elected mayor of our town, Ben was always the one to cheer her on and to help her in any way.  About ten years ago, his sister passed away, Ben gave her eulogy, and when the church swelled to standing room only, Ben was completely overcome with tears.  A very emotional time. Shortly after his sister passed away, his wife also succumbed, and Ben was now alone.

A few years passed, and Ben stumbled alone in his life, helping at church, cooking, and caring for himself, and trying to make ends meet.  When his wife passed away, her social security income was lost, and Ben had to make ends meet, ends that were getting harder to handle.

After church, Ben stopped at our small grocery store to grab a few supplies one day.  When he pulled out of the parking lot heading for home, ½ mile, he neglected to attach his seatbelt, and our local police officer stopped Ben and issued a traffic ticket for not wearing his seat belt.

Ben appeared in our local traffic court, pleaded guilty, and was fined $240! The amount of the fine was overwhelming to Ben; he figured he could afford about $10 a month to pay down the obligation. The money was just not there for Ben to pay the fine, and after 180 days, the traffic ticket obligation was sent to a collection agency. Ben had been able to pay the amount down the $190. The collection agency reached out to Ben for payment; he repeated the same story, he could only afford $10 a month.  The collection agency added $49 to the ticket, and interest was also added at 18%. The rest of the story is easy to understand; the simple error of a seat belt infraction had now grown beyond the original amount to $310.  Now Ben was in real trouble, and instead of asking for help, he just struggled on.

The collection agency kept calling and threatening; their calls were stressful and confusing.  Ben had aged, and it was finally time to move in with his son, sell his mobile home and make life easier.

His mobile home was challenging to sell, and it took about a year to find a buyer. At the closing of the sale, it was discovered that the collection agency had filed a lien for the balance of the unpaid traffic ticket from 8 years ago; the amount with fees and taxes was $845!

The compounding of the interest, the addition of collection fees had almost quadrupled the original obligation.  Now that is compound interest!

The money owed from the traffic ticket was paid at closing, so the collection agency received their money, and they, in turn, paid the city their balanced owed.

Einstein once said that the greatest invention man ever created was compound interest, and in fact, he was correct. On the other hand, Ben probably has a different version of the story. Ben is not alone; most fixed-income people live hand to mouth, one little emergency, and the household budget is empty.



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