Saturday, July 16, 2011

I may not be Einstein, but...

Today, I learned something, and I thought I'd share it with you all! Of course, I can't really tell you this without telling you the story behind it, so bear with me. I'll try to make it as interesting as possible. :)

Today I was talking to my mom, and we got on the subject of finances. I told her I was trying to dig myself out of the hole that the month of May left me in, and she responded by saying she wanted to help me out during my student teaching. My mom knows that I can't/won't usually take financial help from them--they have enough of their own issues--but she did insist on helping me during student teaching. That will be great, seeing as I'll be teaching all day every day from September through December, and not getting paid a dime. As a side note, my mom also had to quit her job during HER student teaching (way back in the 70s). I won't be "quitting" mine all together, but I will be restricted to night/weekend hours, and that will majorly limit the amount of money I can actually make.

ANYWAYS. The point came up that I have a bit of credit card debt to pay off, and my mom started in on her rant about how "awful" credit cards are, and how they snowball, and how I'm getting myself into serious trouble. My mom had to watch my dad declare bankruptcy in the 70s because of his immature misuse of money, and she doesn't want me to do the same. My dad didn't make enough money to pay the minimum payments on his credit card(s), so he defaulted. Since then, both of my parents have been very anti-credit card people.

I must say, not having a credit card (and therefore no credit score) has screwed me over in some major ways. My interest rate on my student loan (taken out freshman year) is astronomical. My sophomore year included me being denied a student loan (because of lack of credit) and almost having to drop out of school. Thankfully, I got my act together and now I have two credit cards, which I use regularly and also pay off (or at least make payments towards) regularly. I've been very responsible with them, and I have never tried to go over the credit limit, nor have I been late with my payments. I'm trying to build myself a good credit score so that I have half a chance at financing anything in my future.

Well, today I decided (for once) that forfeiting the fight (aka listening to my mother complain about my credit card use) was worth more than fighting about it, so I listened to her constant warnings about how much debt I'd be in. She brought up the interest rate on the card, which she said must be close to 30%. Okay, THAT I could not take, so I corrected her in saying it was only 18%, thank you very much. She moaned that that is still "way too high," and that I'll end up "in serious trouble soon enough." I realized at this point that I realistically have no idea how my credit card interest rate works. I mean, I have only ever been charged $5-15 in interest charges per month--for the amount that I owe/have owed them, I definitely didn't see how that was 18%! I expressed this to my mom, who said, "Oh, they must be calculating it wrong." I went on to tell her that what I'm charged each month is only ever a little over 1% of what I actually owe. She told me that a) I'm crazy, b) I must be reading the bill wrong, and c) she's sure they're charging me 18% of what I owe each month.

But that doesn't really happen.

Upon getting off the phone with my mom, I became more and more curious as to what I actually DO pay each month! I logged into my (hopefully secure) accounts online and found the information--just as I had recalled. "Ok," I told myself, "there is something here that you're STILL not getting! Figure it out, dummy!" At that opportune moment, my roommate walked into my room. For those of you who know my roommate, you know that he's close to godly in most things math and science related (and if he's not, he sure does maintain the image well). Anyway, I expressed my concern, and he quickly said, "The 18%, that is APR, right?" "Yeah," I replied.

"Do you know what the A in APR stands for?" he asked me.
"Annual!" I replied happily! I still didn't get it though...

He looked at me for another moment, and said, "Think about what you told me. You pay a little over 1% each month. What's 18/12?"

"1.5!" I replied. And then it hit me.

If you already know how this works, or figured it out before this part of the story, I apologize. My brain clearly seemed to be switched to "off." Finally, it turned on!


Sigh. In case you didn't follow, the 18% is distributed throughout each month of the year. So, you never pay 18% of what you owe any given month; rather, the interest is calculated in such a way so that over the course of a year, you'll pay about 18% of what you owed, on average. (Ok, please excuse my non-math terms, but that's how a non-finance person would understand it.) You can actually read all about it here. Just like I did! They offer a cute little formula (ha ha) to help you figure it out. Basically, this is what did it for me:
An effective annual interest rate of 10% can also be expressed in several ways:

0.7974% effective monthly interest rate, because 1.007974^12=1.1

9.569% annual interest rate compounded monthly, because 12*0.7974=9.569

9.091% annual rate in advance, because 1/1.1=1-0.091

So, the system does NOT work in the following way: I owe x. After month one, I owe 1.1825x. After month two, I owe 1.1825(1.1825x) and so on! That's crazy and I'd owe tens of thousands of dollars by now!

And all of this, this discovery, led me to recall one important quotation that I heard a long time. It was said by the dear old Albert Einstein, proclaimed math and science genius. He said, "If the facts don't fit the theory, change the facts." Well, I don't know how things worked in Mr. Einstein's world, but I don't think that's how things work here. Take this as an example. My mom's theory was that I paid 18% of my debt, plus a minimum payment, each month. The facts (what I'm actually charged) didn't fit her theory. So, she tried to change the facts, saying that I was reading the bill incorrectly, or the company was miscalculating (something I think Visa rarely does, ya know), but guess what?

The facts don't change.

And I think there's an important lesson that one can take away from this encounter (or at least I am doing so). Sometimes, you just have to admit when you're wrong, and change your way of thinking. Not everything works the way you want it to; sometimes, you make a decision based on a theory you have, and the facts just don't seem to agree, so you have to go back and modify that decision, or change it entirely. I think that's so important to keep in mind when trying to figure out "what to do" in life--you can't always change the facts, but you can change the way you think.

Until next time. :)

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