Russia must have taken our advice on the power of compounding...
Last week, Russia announced that the tech giant Google owed it a fine of $20,000,000,000,000,000,000,000,000,000,000,000. (That's $20 decillion.)
Google blocked 17 Russian channels on YouTube after Russia's invasion of Ukraine in 2022. In response, a Russian court told the company it had nine months to restore the blocked channels or it would be fined 100,000 rubles (about $1,000) each day after that period ended.
Google is part of Alphabet, a company worth $2 trillion. Alphabet raked in $88 billion in sales during the most recent quarter alone. A fine of $1,000 per day is pocket change.
But Russia's fine had a twist... For each week that Google didn't pay, the fine amount would double.
So in just a couple of years, that figure has exploded to the amount that hit headlines last week.
Russia admits that the $20 decillion fine is more "symbolic" than an amount the country expects to receive from Google. That amount is exponentially bigger than the International Monetary Fund's $110 trillion estimate of the entire global economy.
And in a call with investors last week, Alphabet acknowledged ongoing lawsuits in Russia but said it does "not believe these ongoing legal matters will have a material adverse effect."
It's clear neither party expects this fine to be paid. But it's a clear – although outrageously large – example of the power of compounding.
Compounding is a way that money can grow, like a snowball effect.
We've written before that compounding is one of the most powerful forces when it comes to growing your nest egg.
But like Google's Russian fine, it can also work against you...
A common example is when you owe money that accrues interest.
A new Bankrate survey found that 50% of America credit cardholders are carrying a balance over each month.
Some of these folks do it on purpose. They think that you need to carry a balance on your card to build credit history.
False.
You build a history just by using your credit card. And if you pay the balance off each month, that shows potential lenders that you're responsible.
If you've followed this nonsense advice about carrying a balance, you're wasting your money and hurting your credit.
When you leave a balance on your credit card, you have to pay interest on it. While it may not be a lot, it will add up over the years.
Of course, not everyone is just trying to build their credit...
The increasing cost of goods during and immediately following the COVID-19 pandemic has led lots of people to putting essential costs on their credit cards.
The Bankrate survey says this and increasing interest rates were the main reasons people maintained a balance on their cards.
But here's what that does to your money over time...
Let's say you have a $6,000 monthly balance on a card that charges a 21% annual percentage rate ("APR"). We'll assume that, like with most credit cards, your interest compounds daily... In other words, each day, you owe a little bit more interest than the day before – because each day's interest increases your debt. (That's why your annual interest expenses add up to more than the percentage on your rate.)
Over 30 days, that 21% APR would cost you around $105.28 in interest. And only paying the interest each month means your balance and the interest would remain the same month to month. Over 12 months, you'd pay around $1,265.
But what if you can't pay the full interest amount each month? Your interest payment for the first month would still be $105.28... But if you only pay a minimum payment of $50 per month, the remaining $55.28 gets added to the original $6,000 balance. So your starting balance for the second month would rise to $6,055.28 and you'd owe $106.22 in interest at the end of the month.
After one year, that $6,000 balance would grow to nearly $6,750. And over those 12 months, you'd pay more than $1,350 in interest... all without touching the original $6,000 of debt that you'd incurred.
Carrying a balance doesn't just hurt your wallet... It also increases your credit-utilization ratio, which is one of the key components when it comes to calculating your credit score. A higher credit-utilization ratio means a lower credit score.
So if anyone tells you to keep a small balance to "help" your credit or that carrying over a balance each month is no big deal... remember the power of compounding.
Take a page from Russia's playbook and let compounding work for your money, not against it.
What We're Reading...
- Russia fines Google more than the world's entire GDP.
- The number of Americans with credit-card debt is at a four-year high.
- Something different: Monkeys will never type Shakespeare.
Here's to our health, wealth, and a great retirement,
Laura Bente, CFP®
November 7, 2024