Confessions of a 13 year old loan shark

Confessions of a 13 year old iced-doughnut-fuelled loan shark.

People ask me when was the first time I thought about money matters in a more structured and deliberate way?

I must confess it was a childhood experience that led me astray and taught me the 7 early financial lessons of the schoolyard.

Read in this article

Like all bad habits, it started in the schoolyard

My first lasting experience of financial life started when I turned 13 and moved to high school with my mate Jonathan. (not his real name - I'm already embarrassed)

Financial Lesson #1: Inflationary Effects of Time on the Value of Money

The school canteen shop began selling pineapple iced doughnuts for 20 cents (and yes that was a time when 20 cents was equal to $1 dollar in today's value (that's the inflationary effect of time for you and a separate financial lesson I was to learn later.) There was a limited daily supply that only went on sale at lunchtime and weren’t available earlier.

My mate Jonathan was cursed with a sweet tooth and an appetite for regularly spending all his lunch money during a sugar encrusted early morning recess binge on teen-friendly treats, leaving him hungry - even ravenous, at lunchtime.

And so my story begins.

Financial Lesson #2: Don't Shop while you're Hungry

Predictably, by 12.30pm lunchtime, Jonathan was broke and hungry and looking for options.

Financial Lesson #3: Value of Delayed Gratification

One lunchtime, he turned to me and asked if he could borrow 20 cents for a doughnut and repay me tomorrow?

Now that would require me to forgo my own lunchtime treat, miss out even,  so I jokingly said, ‘Yeah but the interest rate would be 100% a day,’ not expecting the reply I got.

To my shock and later financial gain, he agreed.

"Deal ! I’ll pay you back 40 cents tomorrow, I gotta have a pineapple doughnut!"

And so began my short career into iced-doughnut-fulled-loan-sharking as a 13 year old.

Financial Lesson #4:  Debts over Time Usually Increase

Initially, I would limit my gains to 100% interest a day for the loan.

Jonathan was smart enough to realise borrowing money on a Friday was an overly expensive event, because the weekend would add an additional two days interest to the debt and therefore an additional 200% interest.  So his financial requirements were initially limited to between Mondays through Thursdays.

Then one Thursday lunchtime, after a particularly intense hankering for pineapple iced doughnuts, Jonathan borrowed another 20 cents, vowing, as usual, to honour the agreement of 100% interest per day.

The following Friday morning, repayment day, he didn't come to school and was off sick with a stomach ache.

Financial Lesson #5:  The trap of Out of Sight and Out of Mind credit

From there my newfound iced-doughnut-based-loan-sharking skills took an unexpected turn.

• Without requiring any additional effort from myself, the expected Friday repayment of 20 cents (principal) and the agreed 20 cents per day interest, (and the two days additional 40 cents over a two day weekend) went through a compounding period.
• The weekend interest calculations meant, by Monday morning, I was due principal plus interest of three days (Friday, Saturday and Sunday).  Monday arrive and Jonathan handed over 60 cents interest and returned the original principle of 20 cents.

This was somewhat intoxicating (and looking back now - somewhat disturbing) to the point I even wondered what would happen if Monday came and he was distracted and temporarily forgot about the debt?

Sadly for Jonathan, his Friday sick day due to tummy ache and the weekend simply added to his financial woes by 3 times what we agreed.

Looking back at the small amounts involved maybe you can smile but when you consider what was really happening, I'm glad that my foray into iced-pineapple-doughnut-based loansharking was short-lived.

Financial Lesson #6: The Market Determines the Price

You see Sally Johnson’s mother was the Lunch Shop Supervisor.

So when Sally and Jonathan became an item, he was rewarded with an exclusive two-for-one iced doughnut option every afternoon by Sally's adoring mother; whereupon Jonathan onsold the second doughnut to one of his diabetic friends for half price.  And so I was cut out of the market as my terms were simply no longer commercially competitive.

The simple truth about simple interest

Simple interest is the basis for much of our commercial economy today where an agreed interest rate is payable upon the term of the loan made (or the length of time a deposit is held).

• Simple Interest works for you when you have a savings account or a term deposit where the interest your money earns might be calculated monthly on the amount you have saved.

In simple terms, simple interest is calculated on the original amount borrowed (or invested) otherwise referred to as ‘the principal amount’ over the agreed time period. You see this in car loans, home mortgages, personal loans,

The words look like this:

On a loan of $10,000 @ 5% simple interest, payable over 4 years the amount to be repaid is the original amount borrowed, plus the interest due.

The numbers look like this:

$10,000 x 0.5 x 4 = $2,000
($10,000 + $2,000=$12,000)

The results look like this:

A loan of $10,000 over 4 years at 5% interest can cost $2,000 in simple interest

You can make your own calculations using the Simple Interest Calculator at the government's SmartMoney site.

The sweetest drug of all

As pineapple iced doughnuts are often a gateway drug to even sweeter foods, simple interest is a gateway to a more complicated increasingly expensive world of compounding interest and its allure of compounding periods.

• This is the domain of credit card companies and the likes of 'after payment services' where you can shop now and pay later, as long as you pay on time. After that, you can find yourself paying for a long long time.

Compounding the problem

But unlike the two-for-one pineapple iced doughnut agreement, credit cards don't use simple interest. They use compounding interest calculated daily (see my next article).

• This is truly the realm of the supervillain and a foe we all have to learn how to defeat.

Lucky for my friend Jonathan, during my younger years, I hadn't yet come to understand the full ramifications of how compounding interest effectively means being charged interest on the interest!

Financial Lesson #7: Advertising is usually Detrimental to Your Financial Life

Albert Einstein is reported to have said Compound Interest is the 8th wonder of the world.

My friend Jonathan would suggest the 8th wonder of the world was actually pineapple iced doughnuts - an appreciation that was to my advantage to encourage and their planned scarcity a way for the school canteen to maintain their desirability.

When Karma Kicks in

When I was just entering high school my unintended discovery of the wonders of simple interest, revolutionised how I understood growing my savings.

But when I left school, some would say ‘Karma Kicked in.’

I was to discover too late;

• the downside of compound interest,
• how a credit card can absorb your spare money,
• a set of mag wheels for a car (that I just had to have), and
• a credit card debt that actually lasted longer than all my high school years put together.

Welcome to the new world of compounding interest and compounding periods; the realm of the supervillain and a foe we all must learn how to defeat.

To this day, I'm unable to stomach a pineapple iced doughnut
- no matter how hungry I am.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.