Do you remember the scene in the movie “Miracle” about the 1980 Olympic Hockey Team when coach Herb Brooks told the young men that today was NOT going to be the day that the Russian team would win? It was a defining moment for that team. Well, we talk about financial Defining Moments.
I don’t care how successful you are, if you do not understand how these financial Defining Moments effect you as you accumulate, preserve, and certainly as you distribute your wealth…well, then today they’ll probably beat you.
Defining Moment #1 is, “your money will never be worth more than it is today.” That sounds really simple and if you think about it, you’ll agree that EVERY financial institution masters this one lesson. Because of this, they also understand the phrase “the velocity of money.”
Money that doesn’t move or have velocity is like money that is stuffed in a mattress; it doesn’t create wealth or profits. To give you an example, the average bank in the United States spends a dollar about five and a half times. Have you ever thought how they do that?
Wouldn’t you love to spend YOUR dollar 5 ½ times? Well, it’s simple. First they TOTALLY embrace this Defining Moment. You see, they take money, and it is not even their money, that is deposited in their bank and lend it to other people.
These people who borrowed the money make payments back to the bank and pay interest. The bank then takes those monthly payments and lends that money out again, over and over. This process continues repetitively about five times on each dollar they touch.
The collection of interest alone is very profitable for the bank. But they understand one rule that creates more profit for them than just collecting interest. They understand that MONEY WILL NEVER BE WORTH MORE THAN IT IS TODAY.
Due to inflation the buying power of a dollar decreases over time. The buying power of $1,000 today with a 3% inflation factor built in will have the buying power of only $412 in 30 years. The banks and lending institutions understand this clearly and they may even encourage you to make additional monthly payments on the money they lent you.
Wait a minute Kelly, I thought that I should pay extra to lower my interest expense?
Well, if you understand and, more importantly, apply Defining Moment #1, then maybe you should ask some questions.
More Financial Caffeine coming your way.
Kelly O’Connor – firstname.lastname@example.org