A Dad Teaches The Magic Of Compounding Interest

Like tens of millions of Americans, I grew up with a peculiarly schizoid relationship to money, one that in hindsight did me no favors.

On this Father’s Day, I am resolved that my daughter will have a better knowledge of money than I ever did.

In my case, I was left even more confused than many of my peers growing up in the 1970s and coming of age in the 1980s in California, Iowa, Wisconsin, Mississippi or Vermont.

I grew up an expatriate in the mecca of private banking: Geneva, Switzerland. My uncle was a financial advisor and my other uncle was a banker — an industry they joined because the family, like millions of others, was financially wiped out in the Great Depression.

Only later, well after World War II, did Switzerland really emerge as the perennial contender for the top spot as the wealthiest non-oil producing nation in the world. It was only much later in life that I realized how lucky I was to have grown up there — and how absurd it was that we never talked about money.

My uncles had a sister, my mother, and she wanted nothing to do with banking.

In fact, she was engaged to a wealthy Swiss man from a family — in banking, of course — but called off the engagement. In the early 1950s in Protestant Geneva, that was tantamount to heresy.

Shortly after that she left Switzerland for Rome, then to the U.S., then to France, then back to the U.S., before marrying my father. That led them to Vietnam, then Lebanon and then a divorce, after which she moved back to Switzerland with me.

My father remained in Western Europe as a foreign correspondent. Like many foreign correspondents, even one like him with a Pulitzer Prize to his name, he was much better at spending money than he was at making it.

No Serious Interest in Compounding

He grasped the power of compound interest, but there’s no indication that he ever executed on this vital understanding by opening an investment account for his son with $1,000 or even $500 — and then simply leaving it there to earn interest on interest on interest.

For certain, he never talked to me about compound interest, or even showed me how it worked and with neither my mother nor with my father did we talk for more than an hour about money: what it is, how it works, how it grows, how it shrinks, appreciation and depreciation.

Most important, perhaps, is that my parents never told me of the one luxury I had before me: time, time to let compounding work on my behalf.

There was always plenty of discussion about financial scandals involving others, how well some people did financially and even how my one financial advisor uncle seemed to be doing very well for himself.

Mom found a job and paid the bills. Dad sent her checks to help.

With the conversion from a fixed to a floating currency exchange rate and the subsequent oil price shocks in the 1970s, by the end of that decade every $100 bill my father sent my mother was worth only 200 Swiss Francs instead of the 700 or 800 at the beginning of the decade.

When mom’s income dropped, we simply moved from a house into an apartment.

She earned enough in a very wealthy country. We spent vacations in France and Italy often, and if you were earning Swiss Francs, as my mother was, you could spend freely in those countries and it would hardly make a dent in your budget.

'Money Bores Me'

There was no reason to be obsessed with money, far from it.

In fact, my mother actively discouraged talking about money. “Money bores me,” she used to say, not only to me but often to invited guests over dinner.

For her, it was almost a point of pride to announce to the world that she didn’t care. I suspect it was in part a reaction to her two brothers joining the banking industry and a rejection of Geneva and the private wealth it stood for.

Finding work in art galleries during her varied and interesting life adventure, I suspect she also ran into a lot of people who spent hours talking about prices and value, not about the artistic expression itself.

The few times I tried to bring up the conversation of money, her terse responses were that we never talked about money. No, not in our family, not with our tradition of discretion and fine taste, whatever that meant, at least when it came to money.

To talk about money was bad form, in poor taste, for “others,” folks excited by base commercial interests.

Yes, I grew up are repressed as they come, particularly when it came to money and only later did the irony hit me: two uncles in finance, banks plastered all over town and I grew up in a household where we never talked about money.

Did I miss something?

In fairness, consumer capital was far less developed than it was in the U.S. and I wasn’t old enough or tuned into the idea that you could borrow against equity and as values rose, so did your borrowing power.

We never, ever borrowed and when it came time in 1989 for mom to retire to the South of France in a small house, she paid for the property, some land and the renovations in cash.

Don’t forget that this was an era before inexpensive computers, compound interest and retirement calculators on the Internet and web banking. Calculating compound interest was a chore, especially for my mother, who never graduated high school.

Since I grew up in rental homes, I can’t recall a time when we ever paid interest. We were never in the business of managing debt and I do remember mom giving me a printed spreadsheet urging me to write down inflows and outflows.

Debt was a four-letter word. Better avoiding it at all costs instead of learning to manage it.

Like many of my peers, I entered college mostly clueless about money and economics, though I had the good sense not to rack up any high- or even low-interest debt. All those surveys about how families don’t talk about money? Yep, that was us.

Breaking the Habit

When my daughter came long in 2004, I vowed I wouldn’t make the same mistake. I would talk to her about money, without going overboard, of course. Most important, though, was to show her the power of compounding.

When she was 9 years old, I stuck a glass jar in her room opposite her bed. In it, I put a $100 bill she received as a birthday gift.

Then I gave her a choice. She could break that $100 bill and buy whatever she wanted as long as it was less than $50. Or, she could leave the $100 bill intact in the jar and I would add a $1 bill to the jar every week for one year.

Since she had nothing in mind she wanted to buy, we left it in the jar and let the principal earn interest.

Her days filled with school, friends, camp and soccer, I suspect she kind of forgot about breaking the C-note. But I often wonder if she lay in bed before falling asleep thinking of the relationship between her “Benjamin” and George Washington on the $1 bills.

I don’t know if this simple interest experiment will influence her in the future, but I refer to it here and there as she gets older and we talk about borrowing and lending. Every time I mention the $100 bill in the jar, she remembers it.

The jar’s gone now, her principal and interest in the bank. Last year, I opened a UTMA account for her at our mutual fund.

Already peeved at myself for not opening an account for her the year she was born, or asking my father or mother for $1,000 to open the account, I withdrew some money in my Roth individual retirement account. I opened an account in her name and shovel $100 a month into it.

At the end of the year, as I have promised myself I will do at the end of every year until she’s an adult, I bring up her account on the computer and show her the power of compounding through the quarterly dividend.

This week she received $41.21 in quarterly dividends and her current balance is $9,879.26. Before long, we’ll both be able to look back with some satisfaction that she’ll have the equivalent of about $1,000 a year in her name.

Many years from now she may revolt, as my mother did, and choose to ignore me entirely. But I want to look back one day and tell that she was blessed with the greatest gift of all, the gift of time, and I wasn’t going to let simple or compound interest just walk away from it.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].