I know what you’re thinking – “Of course we love our families more than we love the bank!” The reason I chose this title is because if we were to examine how we treat our money, it would appear we love our banks (or at least treat them better) than we do our own family, at least from a financial perspective.
We Give the Bank What Could Be Theirs
If we have a traditional loan from our local banker, we set up loan repayments to pay back principal and interest on a scheduled basis. If you look at the attached payment calculator, you will see that for a $20,000 loan we agree to make a payment of $375.86 to the bank every month, which is more than likely taken directly out of our household checking account. Over the terms of the loan we pay back a total of $22,552.
Now, let say we have $20,000 in our account and we want to make the same purchase without taking out a loan. If we love our family, wouldn’t it make sense to make that same payment back to our own account? Then we should agree to the same terms we would if we had taken the loan from the bank. In the end, we capture the interest the bank would have earned off our loan, and our personal account will end up with the same $22,552 that the bank would have.
What this illustrates is that we put ourselves and our family on the same footing as the bank and are willing to treat them as equals. Except if I love my family more then I love the bank, I am willing to pay my own financing operation more then I would pay the bank.
In the next example, I am paying a higher rate then I paid at the bank so I can create a larger pool of money for my next transaction. Now I end up with $24,171 in my account instead of the $22,552. This increases my inventory of cash and it will feed my family’s perpetual wealth strategy.
Once You Understand Interest, You Can Use It to Build Wealth
In reference to interest, Albert Einstein is credited with saying, “Those who understand it – EARN it. Those who don't – PAY IT!" What I have observed over the past 30 years assisting clients with their finances is they will often fall into one of 4 categories.
- Never pay back the money they take from their own account.
These clients think their money has no value and are willing to give it away in exchange for items.
- Pay the money back to their account but with 0 additional interest.
These clients are savers but don’t understand how interest works and or the time value of money.
- Pay back to their account the same as what the bank payment would be.
These clients understand interest but still don’t understand how to get ahead of the bank.
- Pay back to their account at a higher rate than the bank payment would be.
These clients understand interest and know the money they are paying back will grow more inventory, and that inventory will grow wealth.
Why do we do this? I believe it is a symptom of our conditioned thinking, which we discussed here not too long ago. We are taught paying interest is bad, which is true if you’re paying interest to the bank. As Nelson R. Nash stated in his book, Becoming Your Own Banker: Unlock the Infinite Banking Concept, “you finance everything you do, even if you pay cash.” So, why not be your own banker and make paying interest benefit you?
Don Blanton, a friend of mine, is fond of saying that you either pay up interest or you give up interest. So, no matter how you pay for things there is a cost associated with those purchases. At Sage Wealth Strategy, we want to show our clients how to mitigate those costs and actually take advantage of compound interest, putting it to work for them and their family instead of Wells Fargo.