Do What the Banks Do...Not What They Say to Do!
Don’t have trapped money!
Nothing can survive if it is trapped. Yet, many believe that money is different. We are told to invest in CDs, IRAs, 401(k)s, etc. – we are told to trap our money and that it will grow through compound interest. Traditional financial planners state that we should rely on the Rule of 72 (Rule of 72 is a basic investment rule that estimates the amount of time it will take to double your money. Take the percentage of interest on your money and divide it into 72. So, if your CD is earning 5% interest, it will take over 14 years to double your money [72/5 = 14.4 years]). However, in order for compound interest to work, you have to leave it there. The money is trapped and someone else is using it.
How many banks have their money trapped in a CD or investment plan? How many banks rely on compound interest? The answers – none.
Banks know that money does not grow effectively in a trapped situation. In fact, banks move money as quickly and as efficiently as possible. Their money grows through volume and velocity.
Banks eliminate risk and turn liabilities into assets. For example, let’s say that you invest $10,000 in a 5-year CD at 4%. Your money is now trapped for 5 years. This 4% note becomes a liability to the bank – they are obligated to pay you 4% on your $10,000. In order to minimize risk and turn this liability into an asset, the bank turns around and loans out the money to a borrower. Let’s say they provide a car loan at 8%. The bank borrows money at 4% from you and earns money at 8% on the borrower - creating a 4% spread on your trapped money. This is 100% profit and demonstrates volume.
Now because you deposited $10,000, the bank can lend out 10 times this amount. Let’s say that they provide a loan in the form of a mortgage. Considering the banks minimize risk, they mandate the borrower put down money, let’s say 20%. So, the bank provides $100,000 note on a $120,000 property. A 6% interest, the borrower is now paying $599.55 every month. Every month the borrower makes a monthly mortgage payment, the bank can lend this money to other borrowers. This is velocity – how quickly the money moves. The quicker they lend this money out, the more money the bank will earn on your trapped money.
Understanding these banking fundamentals and strategies can dramatically improve your financial future. Doing these strategies yourself in a tax-advantaged environment is even better.
Learn how to reverse these rules into your favor and become your own banker!