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Monday, November 23, 1998

Reverse Compounding

by smackshooter ([email protected])

Compound interest is the eighth wonder of world? Sure it is, and Elvis is the ninth. Or at least that is what I used to think. Growing up in the normal American household, money was a taboo subject. In fact it was more like discussing your trip to Atlantic City with the IRS man than anything else.

Then one day I got my first "real" job during college. It happened to be with a credit card bank. In the orientation/brainwashing session, they explain how the bank makes money. Was it the 1% fee they charged merchants? No. How about the annual fee. Not really. The real secret was... compound interest. All of their favorite customers revolved their balance and only made the "minimum" payment. Little did
the customer realize that the $.99 can of cat food for Mr. Cuddles would end up costing her $95.65 or so by the time she paid it off along with everything else.

This got me really excited and I couldn't wait to tell my parents the next time I saw them. Getting to their house that weekend I blurted out, "We can all be rich -- let's start making credit cards!" Apparently my parents hadn't noticed this phenomenon either and were as amazed as I was. Next thing I know, they're scampering into the office and evaluating their credit cards. Then I hear the snip, snip, snip of scissors.

Needless to say, I'm still grinning like a madman having learned this little compound trick works for investing, too!

Avoid debt and Fool on.

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