Negative Compounding is a Thing
Ask anyone to explain compounding and you will surely get an answer that describes the multiplying effect of making an investment that grows steadily over time. We have all heard the example, if you invested $10,000 at age twenty-five and it doubled every seven years, it would be worth $640,000 at age sixty-seven; it is simple math. Obviously, assumptions can change the projected number, like the rate of return, but the reality is, history shows, if you invest consistently and you don’t have anything that gets you off course, you will see the beauty of positive compounding.
The counter to positive compounding is negative compounding and it can have a major impact on someone’s life. This concept is rarely discussed but is far more prevalent than people like to acknowledge. Just as you can experience positive events compounding on top of each other, you can also fall prey to negative events piling on. As I have gotten older, I have witnessed successful people, espouse the view that you make your own breaks and luck; they like to boast that hard work is the key to success, and their status in life is directly attributable to their own actions. It is a common refrain, and I don’t necessarily totally disagree with the mindset.
If you are living a comfortable life and have had success, you have very likely worked hard, typically made wise choices, and benefited from positive compounding throughout your life. Just like the power of the $10,000 invested early on, you have probably avoided significant challenges to derail you. Or maybe you haven’t avoided big challenges, but somehow were able to pull yourself out of the negative path you were on; that version of life is likely more common; it’s not hard to imagine that many, if not most, people have experienced obstacles along the way.
What I find interesting is the topic of how someone was able to counter a negative event and get back on the path to positive compounding. In many cases they get lucky (I know people don’t want to credit random luck to their success, but sorry to disappoint, it happens); in other cases, they had built up such a large reservoir of positives that they could rely on those reserves to quickly refocus back on the positive path. Think about someone who gets fired at the exact wrong time; maybe they have a new baby, their spouse isn’t working, there is an illness in the family, or they spent their safety funds on something they had to do or wanted to do; losing a job at the wrong time can cascade into bad scenarios. But if you have a history of positive decisions, and contributions, and a network that respects you, maybe you land a new job, and the crisis is averted.
What if, however, you do everything right, work your butt off, stay out of trouble, and make good decisions but struggle to find a way to experience positive compounding? What if “you never catch a break?” As hard as it is for some people to accept, there are a lot of good people who have done everything the way they should have and yet, not achieved a life with meaningful financial success. Not everyone who is poor, or living below the national average for household income, or struggling from paycheck to paycheck can be assumed to have made bad choices or to be lazy. I know this may sound like a generalization, but I am astounded by how widespread the mindset is that people who haven’t done well are exclusively to blame for their lot in life.
A few weeks ago, I was writing while sitting on my porch when I overheard a conversation Doug, a twenty-something year old man, was having on the phone. Doug works for a local contractor and is very adept at remodeling projects; he works very hard; usually six days a week. He has a young son who is two and a lovely wife who also works; I have grown to admire this young man. As I listened to Doug, I became engaged in what he was saying and bothered by what I thought I heard.
After the call I apologized to Doug, told him I was eavesdropping and asked him, “what was that all about?” His response floored me; Doug’s wife shops a Big Lots, a general store that tries to offer most anything you could buy at deep discounts; think a retail store between Dollar General and Walmart. Its shoppers are most often budget shoppers. Doug had set up a monthly payment through his debit card to pay their bill; he said it was usually about $100 a month. Unfortunately, he had to change his debit card because it was compromised, meaning the automatic withdrawal wasn’t going to work. Being diligent and responsible, Doug went online to change the debit card number, only to discover after ten minutes of effort that the site wouldn’t permit him to do that. Thus, he was stuck calling the Big Lots 800 number, on his lunch break. What I overheard that got me annoyed was him having to agree to a fee to talk to a representative to get the number changed. You heard that right, they said the only way he could change the number was if he spoke to a representative and that would be a $9 charge; they called it an expedited payment fee. He incurred a $9 fee to have the privilege to pay his bill, that was 9% of his normal monthly amount.
Imagine for a moment if Visa or American Express told you the next time you call them, they were going to charge you $9 to speak with someone. You would be apoplectic; it would not happen; customers wouldn’t go for that. And yet, Big Lots is doing it. You might ask why their customers accept this; it is a fair question, and one I asked Doug. He said simply, “Boss, it’s always something, I never can get ahead.”
I knew right then what he was saying. If you have spent your whole life experiencing negative compounding, it is a hard cycle to break. It is easy for most of us to scoff at this, and I won’t spend time arguing with you if you do, I will just ask you to consider that maybe a lifetime of always being behind makes you accept it. I know there are countless stories of people who come from nothing to find success, I get it; but there are millions of people who work hard every day and don’t get there.
I am not a softy, nor do I think you could describe me as anything other than a passionate capitalist; I am, however, someone who has seen this personally. I watched a family member who was raised in the best environment, went to the best schools, had all the opportunities in the world, spiral into negative compounding quickly and without a slew of poor decisions. He made a poor choice in who he married, things got ugly, and his wife ran up crazy bills without him knowing it. Next thing you know they are in a messy divorce; he loses his job and is fighting to regain his footing. Because he was struggling to make ends meet, he lapsed on his car insurance, thinking he would get caught up quickly. You guessed it, he then was hit broadside and went to the hospital and incurred large medical costs. Long story short within a year, he was at the bottom of the barrel. He was in the grips of negative compounding. As he said to me, “everything I do seems to go wrong.” Thankfully, in his case he had a support network and family to lift him up; but what if he didn’t; what if he was like most everyone else.
I have come to believe there is a disconnect in this country. Far too often people with resources convince themselves they have the magic touch, and it couldn’t happen to them; it is almost as though they believe they are entitled; a “they worked hard, and things are going to work out mindset.” On the other end of the spectrum, you have Doug; will he ever catch a break? Will the cycle of negative compounding keep him in its vice grip? I don’t know, but he has a chance; this country still enables that. But make no mistake about it, there is such a thing as negative compounding, it is everywhere, and it is as powerful as positive compounding.
Oh yeah one more thing, the CEO of Big Lots made over $7.7 million in compensation last year, and the company is telling Wall Street it may struggle to meet its financial obligations.
