Here’s a mathematical puzzle to nudge your noggin: how can you take $8,800 and turn it into $7.5 million? Ben Franklin knew the trick; he left $4,400 to Boston and the same sum to Philadelphia, leaving the heavy lifting to compound interest. Exactly 200 years later, Boston had a tidy sum of $5 million, with Philadelphia reaping about $2.5 million. Wonderful! But compound interest can also work against you, especially if you owe child support.
Rather Go to Bed Without Dinner Than to Rise in Debt
Sure; that headline is another Ben Franklinism. Debt is a scourge. If you owe child support, you are in debt. You may think child support debt is not as painful as mortgage debt or even uncollateralized personal debt (signature loans and credit cards). You’d be wrong to think that.
If you owe money to private businesses, they have to spend money to recover the money you owe. They will pursue you, even sue you, and they may destroy your credit rating with agencies like Experian, TransUnion, and Equifax. But that’s about it. You might even “get away” with it.
If you owe child support, the Commonwealth of Virginia will recover the money. We are not saying “might,” or “may,” or “will try to.” We are saying Virginia’s Division of Child Support Enforcement (DCSE) will recover the money. They will not give up. They will not forget about you.
And if DCSE does not, somehow, get what your children are owed, a federal agency will. The U.S. Department of Health & Human Services maintains the Office of Child Support Enforcement (OCSE). How effective is OCSE? This year (2021), the office reported a plunge in child support arrears of more than $4 billion, the largest drop, ever. Parents are paying up.
Those Who Understand Compound Interest, Earn It. Those Who Do Not, Pay It.
That headline is also a Ben Franklin saying. Compound interest is a curious mathematical and financial tool. Here’s a quick primer:
- Interest is money paid by a borrower to a lender for the privilege of borrowing the money; consider it a user’s fee of sorts
- Simple interest is interest accumulated based on a basic formula: multiplying the principal, P, times the daily interest rate, I, times the number of days, N, between payments (P x I x N); it’s based only on the amount of the loan (the principal)
- Compound interest is interest accumulated on the principal plus all the previously accumulated interest; its formula is far more complex but includes compounding periods and interest rate as a percentage
Let’s use some simple numbers. If you owe $1,000 at 12 percent simple interest, after 2 years you will owe $1,240. If you owe $1,000 at 12 percent interest compounding continuously, after 2 years you will owe $1,271.25.
The difference between simple and compound interest in our example is “only” $31.25. But that difference represents the power of compound interest.
Owing $1,000 in child support arrearages is actually small potatoes. According to the National Conference of State Legislatures (NCSL), Virginians owed $2,507,932,963 in child support arrearages in 2018 (the latest data year). That’s more than $2.5 billion.
A Penny Saved Is Two Pence Clear
Forget the “penny earned” thing; Franklin never said it. He did, though, write our headline for us. By paying your child support promptly and avoiding arrearages, you avoid the pain of compound interest. You keep your two pence — er, cents.
Suppose you owe six months of back payments, a total of $6,024 in principal. The six months’ debt, at only 6 percent interest, will snowball like this in a year:
- One month later, you owe $6,054.12
- Two months later: $6,084.39
- Three months: $6,114.81
- Four months: $6,145.39
- Five months: $6,176.11
- Six months: $6,206.99
- Seven months: $6,238.03
- Eight months: $6,269.22
- Nine months: $6,300.57
- Ten months: $6,332.07
- Eleven months later: $6,363.73
- Twelve months later, you owe $6,395.55
You started out owing “only” $6,024, but now you owe $6,395.55, a difference of $371.55 due to compound interest. Keep in mind, even while you are actively ignoring those six months of payments, you are simultaneously accumulating more debt.
How do you stop this blizzard of crushing debt? You work with your family law attorney, Virginia’s DCSE, and your ex-spouse to pay the arrearages. You wipe away the debt, even if it means foregoing some niceties for a while.
Compound interest can be a miracle to provide higher education for your children, even after divorce. It can also be a ticking time bomb, able to destroy your own financial future if you choose to avoid timely payments of child support.
Call Our Virginia Beach Child Support Attorneys
The Firm For Men is your Virginia family law resource. Contact us today to let us help you control your financial future, protect and preserve your assets, and defend your rights as a Virginia man. You may also reach us at (757) 383-9184.