Banks make your money work hard for them. The banks keep your mortgage and other loans separate from your checking and savings accounts. What purpose does this serve? This allows them to make as much money as possible on all of your accounts.
Banks make money by lending your money from your checking and savings accounts to other borrowers. They make money by lending the money from other people’s checking and savings accounts to you. The banks make money by lending your own money back to you with interest. Would you like to be your own bank?
Keep this process in mind as we go through the following principles. You can eliminate debt and create wealth to turn the tide and have your money working for you.
An open-end loan is a revolving line of credit issued by a lender or financial institution which is approved for a specific amount. It is very flexible, meaning you can take out as much or as little as you need up to the amount of your credit limit, and once you pay off that amount, you can reuse the line of credit again later. Examples of open-end loans are credit cards, some bounce protection lines on checking accounts, and a home equity line of credit, or HELOC.
Closed-end loans are dispersed in full when the loan closes and are paid back, including interest and finance charges, by a specific date. These types of loans are referred to as “installment loans” or “secured loans.” Closed-end loans allow borrowers to buy expensive items–such as a house, a car, a boat, furniture, or appliances and are paid on schedule or penalties and fines are imposed.
Taking a mortgage as an example, the less you owe on your mortgage balance, the less interest you pay. It makes sense to find a simple and easy way to lower your mortgage balance to pay less interest and reduce your number of monthly payments. Where do you get the extra money to lower your mortgage balance to pay less interest? The is where the excitement begins!
Float and Leverage
Leverage is the use of debt (borrowed capital) to multiply the potential returns from another investment or undertaking. Many companies use leverage to finance their assets. Instead of issuing stock to raise capital companies may use debt financing to invest in business operations to increase shareholder value. Consumers may use float to earn interest in a separate account while utilizing the bank’s assets to sustain their lifestyle.
Most people have more than one debt. Which debt should you make strategic transfers to first? Some people recommend that you pay off your smallest debts first, regardless of interest rate, since eliminating the monthly payment for that debt will free up more of your money to go toward other debts. Other people say to pay off your highest interest rate debt first so that your money will have the greatest impact and cancel the most interest. Both methods have merit. There is another way.
Albert Einstein said Compound Interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it. This statement could not be truer! Those who spend 30 (or more) years paying interest on mortgages, cars, credit cards, etc. are simply making the banks rich—extraordinarily rich! Fortunately, those who have the right tools and understanding can also become rich! As you may already know, your money has great potential power. If you use it correctly, and with the right tools, your money can multiply almost exponentially.
By using these principles and applying them to your debt, we can show you how to pay off ALL your debt, including your mortgage, in as little as 5-7 years, and convert your debt into wealth!