My dear child:
In all my years of investing, I've never found anything that reliably pays me twenty-two percent a year. The bank found one, and it's you.
In America, the average credit card that carries a balance charges 22.36 percent. That's the Fed's latest count, and wherever you're reading this from, your card is in that neighborhood or worse. So many of my letters have been about getting compound interest to work for you. This one is about what happens when it works for somebody else.
Let's do the math. Say you owe $5,000, you put nothing new on the card, and you only ever pay the minimum. A common way card companies figure the minimum is that month's interest plus one percent of what you owe, or $25, whichever is more. So your first bill asks for $143. That sounds manageable, and it's meant to.
But as the balance comes down, so does the minimum. That's the minimum payment trap. Every month they ask for a little less, and every month the debt lasts a little longer (the bank, I promise you, did this math long before you did). Pay it their way and you'll be paying off that $5,000 for NINETEEN years. The interest alone comes to $8,241, so you end up paying for whatever you bought more than two and a half times over.
Now say you keep paying that first $143 every single month, even after they start asking for less. Same card, same rate. It's gone in under five years, and the interest comes to $3,165. Turning down the bank's little discount every month saves you $5,076 and fourteen years.
My point is this: compound interest is the same machine whether you own it or you owe it. It never takes a night off.
So tonight, open your last card statement. If you can pay the full balance, pay it, every month, and most cards will never charge you a dime of interest. If you can't yet, pick a number well above the minimum, set it to pay automatically, and never let it go down. If you've been wondering where to start investing, start here. Every dollar you pay down stops costing you whatever that card charges, and no investment I've ever owned has paid me that reliably.
I spent my whole life trying to get compound interest working for me. Don't let it spend the next nineteen years working on you.
One thing I'd tell my younger self: Pay the card off in full, every month.
From the bookshelf: "The Simple Path to Wealth" by J.L. Collins. He boils money down to a few plain rules, and staying out of debt is one of them.
A tool on my bench: A balance is easier to pay down when you can see all of it at once. PocketSmith puts your cards and accounts on one page. (Affiliate link. The letter earns a small commission if you subscribe.)
Yours sincerely,
