What Is Draining Your Bank Account?

Albert Einstein, Napoleon Bonaparte, Baron Rothschild and John D. Rockefeller supposedly all marveled at this one, incredible force. They marveled at its power to destroy—at the personal level, corporate level and national level.

That force is compounding interest.

It might not sound very interesting, but it has been called the eighth wonder of the world. It can ruin lives or be a tool for immense wealth building—if it is understood and used properly.

But most people don’t understand it. The proof?

Everyone’s soaring debt.

Consider America’s record student loan debt ($1.83 trillion), record vehicle debt ($1.68 trillion) and record credit card debt ($1.25 trillion), the trillion-dollar-trifecta of terrible financial transactions.

Then there is America’s record mortgage debt ($18.8 trillion).

A 2024 study by Peterson-KFF Health found that Americans also owed a record $220 billion in medical bills. (Some of that might be included in the record credit card borrowing.)

State governments owe a record $2.7 trillion. Cities and towns owe an additional $1.4 trillion. Public school districts another $1.2 trillion. Counties: $757 billion.

That’s a lot of records, and not good ones. And we haven’t even mentioned the biggest one of all: United States federal government debt.

If people truly understood how interest worked, they would avoid it like the plague, not load up on trillions of it.

Here is what you need to know. Interest is the money you pay to the lender for the privilege of borrowing. When the pay period comes due, you owe the amount you borrowed plus the interest. If you don’t pay it in full, it compounds. In other words, in the next pay period, you will owe interest on both the original amount you borrowed and the interest.

Paying interest on interest will cause your debt to soar.

That’s the eighth wonder of the world working against you and for the lender.

Consider your credit card. If you make the minimum $100 monthly payment on a $5,000 dollar debt, it will take you 19 years to pay it off, and you will spend $13,000 to do it. If you miss payments along the way, you will get hit with penalties and higher interest rates, on top of the unpaid interest. So it will take you even longer and cost you more to get out of debt. That is why Mastercard and Visa are some of the most profitable companies in the world. They thoroughly understand how interest works.

Consider what happens when you purchase a home. If you borrow $400,000 to buy a house with a 30-year mortgage at a 6.5 percent interest rate, you will pay more than $910,000 for the home by the time you are done. The interest alone is more than the total value of the house. You better believe that JP Morgan Chase and Citibank understand this principle.

Vehicle loans are another great way to needlessly drain your bank account.

“If you want to be middle class, stay in car debt. You will never build wealth because it will suck the bone marrow out of your money,” said financial adviser Dave Ramsey. “You don’t go into car debt, ever, if you want to build wealth.”

“Ever” is a strong word.

But if you understand how interest works, you understand why.

According to NerdWallet, the average used car payment in America is $531 per month for 68 months. The average vehicle loan is $27,070. With a typical 6.4 percent interest rate, over the life of that loan, you would pay more than $5,000 in interest. But here is the worst part. By the time you pay off that vehicle , it won’t be worth anywhere near the $32,000 you paid.

The math on financing a new car is even worse. A new car loses approximately 50 percent of its value after five years. Paying interest on a rapidly depreciating asset is always a bad financial decision.

“I guarantee you’ll be broke your whole life as long as you stay in car payments because it’s the most expensive thing you buy that goes down in value,” Ramsey said.

A whopping 86 million people in America make vehicle payments. And the percentage of borrowers who have locked them selves into longer seven-year loans has doubled since 2018.

If people just got rid of the car payment, it would change their life, says Ramsey. If you instead saved up and bought a less expensive vehicle for cash, then put $531 into a conservative investment of some kind rather than into a monthly car payment, you would easily become a millionaire within about three decades.

Do the math yourself. Plug that $531 into an online compound interest calculator and see what sum it multiplies into after 30 years. Assume a 10 percent return on investment (the approximate stock market average) and you end up with more than a million. Do the math on the average $770 new car payment. That comes out to $1.5 million.

That too is the power of compounding. It makes the eighth wonder of the world work for you instead of against you.

That $8 Frappuccino at Starbucks every day? Invest it instead, and after 30 years, it becomes $470,000.

Sadly, the concept of compound interest isn’t something students learn these days.

Student loan debt is rivaling auto loans for the irresponsible debt title. The average student borrower owes almost $40,000, oftentimes for a degree that is worthless to their actual career—or just worthless.

It has gotten so bad that the Trump administration recently limited what types of degrees students can borrow money for. According to the administration, too many students are taking on unsustainable levels of debt for degrees that offer no observable advantage over high school diplomas. In some fields of study, college grads are actually earning less after four years than their non-debt-burdened high school counterparts. Now, before students are allowed to take on government loans, undergraduate programs have to show that graduates will actually earn more than those with high school diplomas. Masters and doctorate programs have to show that graduates will earn more than graduates with just bachelor’s degrees.

And that is a good thing because starting August 1, a lot more students will be face-to-face with their debt choices.

The Biden administration allowed students to put off making debt payments due to covid-19. The Big Beautiful Bill, which was passed last year, ends that forbearance.

Compound interest is about to be a forced part of the curriculum. And it will be a uniquely painful lesson because student loan debt is the only kind of debt that you can’t get rid of even if you declare bankruptcy. By law, once you borrow it, the debt and all its compounding interest remains with you until you pay it off or you die.

Forty-two million Americans have student loans. For the past several years, instead of repaying them, they spent that money at Walmart, on rent, starting businesses, and living life. Now payments are once again required, all that debt is accruing interest again, and standards of living are about to drop.

It is kind of ironic that the federal government is giving lessons on debt and interest. The feds haven’t actually paid America’s national debt down since the Clinton administration.

Last week, America’s national debt hit a record $39.3 trillion.

At the national level, interest payments are increasingly impacting America’s finances, says money manager Bryden Teich. “You are getting to this overall level of debt burden,” he told the In the Money podcast, “where even at these interest rates, the U.S. is going to spend more on interest this year than they are spending on defense or Medicare.”

Debt payments are now America’s number one budget expense (outside of Social Security, which has its own source of funding). And they are growing fast.

If America’s debt problem isn’t confronted, eventually there won’t be any money left for anything else.

People need to learn math—and the true compounding cost of that new kitchen upgrade, bi-weekly lunch meeting at Panera, or additional squadron of F-35 fighter jets.

This isn’t a new problem. The ancient Babylonians understood compound interest and marveled about how quickly a debt could double. That was 3,600 years ago.

King Solomon warned about the danger of debt too. He might be the richest man to have ever lived. Proverbs 22:7 is probably his most famous proverb about wealth and debt: “The rich ruleth over the poor, and the borrower is servant to the lender.”

The word servant means slave, or “servant of a servant” (Gesenius’ Hebrew-Chaldee Lexicon).

That is God’s perspective on debt. And that is what paying interest on interest does. It turns you into a servant of a servant, or a debt slave of a debt slave.

Compounding interest can be an incredible curse.

God told the ancient Israelites that if they disobeyed His laws, “He shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail” (Deuteronomy 28:44).

But the power of compounding interest can also be a powerful tool for building wealth.

Psalm 37:21 says, “The wicked borrows, and cannot pay back, but the righteous is generous and gives” (Revised Standard Version).

Building wealth the right way is a blessing and can be a great tool for helping others and doing good.

In the parable of the pounds, the nobleman commended the servants who multiplied the money they were given. The first servant took one pound and earned 10 pounds. The second servant compounded his one pound into five pounds. Christ called them good and faithful servants and rewarded them with rulership over cities.

Yet what happened to the servant who did nothing with what he was given? Christ asked him: “Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?” (Luke 19:23).

Christ called him a wicked servant for not even trying to grow what he was given by charging interest.

Although this parable is speaking primarily about growing spiritually, it also offers physical principles to build your life around.

Albert Einstein, Napoleon Bonaparte, Baron Rothschild and John D. Rockefeller may have understood the physical application of the parable of the pounds in Luke 19. They probably knew all too well the dangers of debt, interest and the power of compounding.

Learn those lessons in your life today. Make the compounding power of the eighth wonder of the world work for you, not against you. As Dave Ramsey said, don’t let it “suck the bone marrow out of your money.” Instead, follow the advice of King Solomon to avoid debt slavery and become a good and faithful and profitable servant.

For more information about the most important law governing your finances, read The Financial Law You Can’t Afford to Ignore.