DEBT DIAGNOSIS

Inter­est is always work­ing. It is either work­ing for you or against you. You are either earn­ing inter­est, pay­ing inter­est or los­ing the oppor­tu­nity to earn inter­est. There are no other scenarios.

As a soci­ety we have been trained to look at cer­tain aspects of bank­ing in a lim­ited way because by so doing we can eas­ily be manip­u­lated into think­ing some­thing we are offered is a good thing for us, when in fact it isn’t.

There are mul­ti­ple mar­ket myths and half truths that have dis­torted what peo­ple believe is help­ing them finan­cially when in fact it is hurt­ing them. Basi­cally we have been taught to do what the banks want us to do and think the way they want us to think.

We are taught to focus on inter­est rates with­out con­sid­er­ing in the least, the cost involved. We are taught to chase high rates of return on our invest­ments and low rates on what we are charged but never to under­stand the dif­fer­ence in the inter­est cal­cu­la­tions and the dol­lars involved, which has noth­ing to do with the rates involved.

How many peo­ple do you know who actu­ally draw a line down the cen­tre of a piece of paper and on one side write down the actual amount of inter­est in dol­lars they have earned over say a year and on the other side of the same piece of paper write down the dol­lar amount they are pay­ing in inter­est charges? I hope you under­stand that I am not talk­ing about inter­est rates and rates of return, I am talk­ing about the actual amount of inter­est in dol­lars that one either earns or pays or loses the oppor­tu­nity to earn?

We can even take this a step fur­ther and draw a sec­ond line cre­at­ing a third col­umn where we add up how much cash we have spent. Then we deter­mine our lost oppor­tu­nity cost over a life­time, of spend­ing that money. Cash spent will never be seen again over your lifetime.

There are mul­ti­ple ways of cal­cu­lat­ing inter­est. I don’t know them all, but some are com­pound, sim­ple, aver­age daily bal­ance, amor­tized, min­i­mum monthly bal­ance, to name a few.

The way inter­est is cal­cu­lated makes a huge dif­fer­ence to the actual costs asso­ci­ated with a loan. For instance when you pur­chase a car for example

the inter­est rate might be 5%,

cost of car $25,000,

monthly pay­ment $575,73,

with a 48 month term.

So what is 5% of a monthly pay­ment $575.73? answer is $28.79. Most peo­ple think this is what they are paying.

 

How­ever the first pay­ment will be divided into $471.56 towards prin­ci­pal and $104.17 towards inter­est. So that means you are actu­ally pay­ing 18.09% inter­est that month.

After 12 pay­ments you have paid $5,790.24 in prin­ci­pal pay­ments plus $1,118.52 towards inter­est equals a total of $6,908.76 in pay­ments. The per­cent­age of inter­est vol­ume you have paid the lender is 19.31% dur­ing the first year.

Year 2, 24 months later, you have paid $1,883.81 of inter­est divided by $11,357.98 of prin­ci­pal = 16.58% inter­est cost or volume.

If you do pay the whole loan back over 4 years you will actu­ally pay $2,635.15 in inter­est charges which is 10.54% of $25,000 on a loan charge rate of 5%.

 

click on illus­tra­tion to enlarge.

Do you think this is why we are taught to focus on inter­est rates and not the actual  inter­est cost or volume?

The national aver­age is that most peo­ple return their vehi­cle for a trade in before they have paid off their loan, so dur­ing the last year or two when you would be pay­ing mostly prin­ci­pal pay­ments you start a new loan all over again begin­ning with the higher per­cent­age going towards inter­est. This increases the inter­est rate because it is in the last year that the amount of inter­est you are pay­ing is reduced, because you have already paid for most it dur­ing the first three years, which reduces the over­all cost of inter­est. That’s why your friendly sales­man wants to give you a deal if you bring your car in before the term is up.

The inter­est rate does not mat­ter as much as the cost of the inter­est you are really paying.

Once you pay the lender your money for the car, that money has now gone, never to be seen or used by you again. So now you have to start all over again, bor­row­ing more for the next thing you want.

And if you pay cash, don’t think you are not mak­ing pay­ments monthly. You are. You are mak­ing pay­ments to a sav­ings account until you have enough money to spend it on the next car. Once you with­draw that money to pay for the car you have lost the life­time of oppor­tu­nity that cash could be earn­ing for you, for­ever.  So you might be sav­ing inter­est charges but are you? Read here to find out why CASH is not nec­es­sar­ily KING.

What if there was a way to recap­ture not just the 17% or 10.54% inter­est charges but also the prin­ci­pal so it was avail­able for you to buy the next car with when you are ready for a new one? Would it be worth it to you to learn how? How many invest­ments offer 10.54 or 17% or even 116% (as you will see below) returns, guaranteed?

If you are pay­ing for a mort­gage, go and have a look at your amor­tized pay­ment sched­ule which you should have received when you signed all the paperwork.

Let’s look at a $200,000 mort­gage being charged a 6% inter­est rate over 360 months (30 years). The monthly pay­ment will be $1,199.10.

6% of a $1,199.10 monthly pay­ment = $71.95

How­ever, in real life, in month one, $1,000 goes towards inter­est and $199.10 goes towards pay­ing back the prin­ci­pal. You are actu­ally pay­ing 83.39% inter­est vol­ume for your first months payment.

Did you know the national aver­age for Amer­i­cans either refi­nanc­ing or sell­ing and re-buying their mortgage/home is 5 years?

At year five, the inter­est vol­ume is still above 80% at about 80.69%

So for a mort­gage that is charg­ing a 6% inter­est rate, you are really pay­ing over 80%.

It takes 21 years to pay off half the amount you bor­rowed, $100,000 but you have paid the lender one and a half times the amount you bor­rowed. Yes, you have paid the lender $302,173 and you still owe $100,000 to them.

Also, if you keep pay­ing the mort­gage every month with­out fail and are charged no late fees or penal­ties you will pay a total of $431,677 for bor­row­ing the $200,000. That equates to $231,677 of inter­est vol­ume which is really 116% of what you borrowed.

This is a mort­gage loan with a 6% inter­est rate. So can you see how the cost of a loan is more impor­tant to under­stand than the rate being charged?

Click on illus­tra­tion to enlarge.

When you refi­nance after 5 or even 10 years to get points of a per­cent off your rate, you must con­sider the fact that you will be;

1. start­ing your mort­gage all over again from month one, length­en­ing the time you will be in debt,

2. increas­ing the amount of inter­est you will be pay­ing by pay­ing the high­est per­cent­age of vol­ume, and

3. pay­ing refi­nance charges on top of that which is really set­ting you back and send­ing you fur­ther into debt rather than help­ing you get out of debt, even if your monthly pay­ment is lower.

4. Under­stand that it will take you at least 5 years to break even with the money you saved by reduc­ing the inter­est rate. At that time is prob­a­bly when you will start the process all over again if you are like aver­age America.

Do you know of any invest­ment oppor­tu­ni­ties where you can earn rates like you are pay­ing on a mort­gage? Are you start­ing to get the pic­ture of why you must under­stand what you are actu­ally pay­ing in inter­est charges com­pared to what you are actu­ally earn­ing as inter­est income that must be taxed and look at both sides of your finan­cial pic­ture on the same page at the same time?

Where else can you earn 116% or even 80% as a guar­an­teed return? You see isn’t cap­tur­ing the inter­est charges you are now pay­ing some­one else, the same as earn­ing 116% or 80% for your­self? Please wrap your mind around that. This must be under­stood if you want to reverse the flow of your money back towards you instead of away from you. On top of cap­tur­ing the inter­est charges you can also cap­ture the prin­ci­pal pay­ments as well. Has a light gone off yet. If not, call me today for fur­ther explanation.

Imag­ine though if you owned the mort­gage note?

So we have com­pared inter­est rate ver­sus cost. Next we will look at Inter­est earned ver­sus charged.

Inter­est is always work­ing. It is either work­ing for you or against you. You are either earn­ing inter­est, pay­ing inter­est or los­ing the oppor­tu­nity to earn inter­est. There are no other scenarios.

Money has to move to earn. Stag­nant money is money in jail. But for whom is it in jail?

Some exam­ples of stag­nant money are Qual­i­fied Plans and CD’s.

Some exam­ples of cash flow­ing and con­stantly mov­ing are Qual­i­fied Plans and CD’s.

What am I talk­ing about? I am talk­ing about the dif­fer­ence between who­ever has con­trol of the money makes ALL the difference.

If you are deposit­ing your money into a qual­i­fied plan or a CD, aren’t there restric­tions and penal­ties if you touch YOUR money at any point before the term is up? Who set the term? The one who is in con­trol of your money. Why are you dis­cour­aged with restric­tions and penal­ties, from mov­ing your money? Is it to pro­tect you, so you don’t spend it all before your retire­ment, or before the set term? Of course not. It is so they (the ones in con­trol of your money) can keep your money mov­ing for them­selves. It is not the owner of the money but the one who has con­trol of mov­ing the money who is mak­ing all the profits.

That’s a bit off the topic of inter­est so let’s get back on track.

Let’s start with Inter­est Charged

If you look at your monthly state­ment of any of your loans, it should always show you how much of your monthly pay­ment is pay­ing off your prin­ci­pal debt, and how much is pay­ing the lender as interest.

Right now, I want you to go and get the most cur­rent state­ment of all of your debts, includ­ing credit cards, stu­dent loans, mort­gage, car loans, and any other loans you have that you pay inter­est on. Go now and get them. Yes, this is a doing blog post not just a read­ing blog post.

Step 1. — Write down each debts name on the left hand col­umn of a page.

Step 2. — In the next col­umn, write the total amount you orig­i­nally bor­rowed for each loan.

Step 3. — In the next col­umn write the total amount you owe now, for each loan.

Step 4 — In the next col­umn write your total monthly pay­ment amount for each loan.

Step 5 — Now write just the amount of each pay­ment that pays off prin­ci­pal debt.

Step 6 — Now write the amount of each pay­ment that pays inter­est to the bank.

Step 7 — Next is where you will need a cal­cu­la­tor unless you are a math wizzz. Here you will divide the inter­est by the pay­ment to deter­mine the inter­est vol­ume you are pay­ing right now for each and every loan.

As an exam­ple your monthly pay­ment is $1,199.10 of which $1,000 goes to inter­est and $199.10 to prin­ci­pal. So in your cal­cu­la­tor punch in 1000 divided by 1199.10 = and the answer will show as 0.8339588 which trans­lates to 83.396 or 83.4% inter­est volume.

$1,000 = 83.4% of 1199.10.

Now we want to deter­mine what per­cent­age of your total income is actu­ally going towards pay­ing inter­est on debt each month, so…

Step 8 — Add up all the amounts of inter­est listed for each debt for this month.

Step 9 — Fig­ure out what your gross income is. What do you earn before all the deduc­tions of social secu­rity, medicare, taxes etc. etc.

Step 10 — Now type into the cal­cu­la­tor the total of the inter­est you pay to all your debts every month, the num­ber from step 8. Then divide this by your gross income total and see what per­cent­age of your income is pay­ing inter­est to some one else’s bank each and every month.

The national aver­age that peo­ple pay in inter­est pay­ments every month is actu­ally 34.5%. Where do you stand in comparison.

If you are happy work­ing for 8 out of every 12 months to pay for taxes, debt inter­est and insur­ance costs then keep doing what you are doing. If you would like to learn about a legal and eth­i­cal way to reduce these per­cent­ages, call me now. 845 – 649-7487.

Fol­low­ing the same type of columns but on a sep­a­rate piece of paper, write down all the dif­fer­ent types of invest­ments you own that you earn inter­est on. If you sold or with­drew it today, what would that be?

There are dif­fer­ent types of earned interest.

We have the sim­ple sav­ings account. How many dol­lars and/or cents did you earn this month? How much was deposited into your account? And how much money had to be stag­nat­ing in your account to earn that amount?

Does your bank pay inter­est on your low­est monthly bal­ance or on the aver­age daily bal­ance? If you have $10,000 sit­ting in your sav­ings account for 29 days of a month and then with­draw it so you have maybe $100 left in the account, does the bank pay you inter­est on the low­est monthly bal­ance of $100 or on the aver­age daily bal­ance where for 29 days you had $10,000 and depend­ing on the month, $100 for 1 or 2 days?

Does your bank add the inter­est to your account monthly so you earn inter­est on the inter­est over the year or does it deposit the inter­est into your account at the end of the year?

Then there are CD’s (Cer­tifi­cates of Deposit). Aver­age out the amount you earn each month, the dol­lar amount that is actu­ally added to your account. And once again, how much do you have to have deposited, sit­ting there, in jail, untouched by you, for you to earn the pit­tance they pay you? Also, how much penalty do they charge if you have an emer­gency and need to with­draw your money to cover it?

If you have $10,000 in a CD earn­ing 3% you will earn $300 over the year divided by 12 months = $25 in the first month. If the $25 is deposited into your account that first month, depend­ing on how they fig­ure out the inter­est, you could earn $25.06 in the sec­ond month, because now you are earn­ing inter­est on $10,025.00. But, if they deposit the inter­est after the first day of the sec­ond month and they fig­ure the inter­est using min­i­mum monthly bal­ance you will still earn the inter­est on the $10,000 as that was your low­est bal­ance for that month.

Of course we also have to take into account the fact that we owe taxes on all inter­est earned. So what tax bracket are you in and how much will you need to deduct from your inter­est earn­ings for the taxes?

You must fig­ure out how much you have earned on your invest­ments, not by look­ing at the inter­est rate or rate of return or what ever but by using the dol­lar amounts like we did for the car loan and mort­gage above.

Also, if your invest­ment is doing really well and you have growth and a profit, that money is not really yours until you take it and deposit it into an account where it is safe because that growth may dis­ap­pear tomorrow.

Study the dia­gram below so you see how just tak­ing into account inter­est rates can be deceiv­ing. If you had $100,000 and a drop in the mar­ket meant you lost 36% but then you hap­pily found out that now you had a swing up 83%, (all this tak­ing place over a seven year period) then you would prob­a­bly feel really good right. But if you switch out the per­cent­ages and replace them with actual dol­lars amounts you real­ize that you really only had a 1.92% return on your money over seven years. That doesn’t include the mutual fund man­ager fees you pay whether they are per­form­ing well for you or not. And also the taxes on that cap­i­tal gains and the lost oppor­tu­nity of what that money could have been doing for you over that seven year period is great. Also, infla­tion has low­ered the value of your dol­lar over that period of time and so your dol­lar pur­chases less than what it did 7 years ago.

How many inter­est dol­lars are you pay­ing towards inter­est each and every month?

What per­cent­age of every dol­lar you earn is flow­ing towards some­one else’s bank?

Now how many inter­est dol­lars are you actu­ally earn­ing (after expenses) on your sav­ings and invest­ments each and every month?

NOW, why would you not want to spend some time talk­ing with me about a whole new way of banking?

Why would you not want to have a par­a­digm shift in your way of under­stand­ing how to set up your finances so your money is flow­ing back into your life instead of away from you and bet­ter­ing some­one else’s life instead?

The finan­cial model most fol­low needs some changes. If we want to change our coun­tries finan­cial sit­u­a­tion, we must start with our own finan­cial sit­u­a­tion. You can do some­thing about this. There is the solu­tion. Call me today so I can do a webi­nar with you and show you so much more and so many more ben­e­fits you will be amazed.

I look for­ward to shar­ing more with you soon.