We hear every day, “I thought that I should pay extra principle to lower my interest expense?”
First, the banks are in a win-win situation no matter what you do. You see, if you don’t make additional payments because you understand that you are giving the bank control of more money, then they will just collect more interest over time.
If you do make additional payments the bank doesn’t just sit on it. Remember, they’ve mastered Defining Moment #1 and the velocity of money. That additional money from you is used and lent back out to start the process all over again.
What would you rather do, follow traditional planning and make all attempts to have your $10 earn $1 more? Keep in mind, you have to deal with all the other flexible factors that we discuss in our Why Traditional Planning Fails To Reach Its Goals (future posts). Or, function more like a bank and have your $10 do the work of $50?
Yeah, I think the bank model works quite well. So what do we do? Well, here’s an important question: do you believe banks have your best interests at heart? Most people say no. If you said “no”, then have you ever asked yourself why banks offer a lower rate on a 15 year mortgage than a 30 year? If they don’t have your best interest at heart and they are giving you an incentive to go with a particular product, then maybe we should do a little math.
They understand perfectly AND IMPLEMENT the Defining Moment that money will never be worth more than it is today? They want as much of your money as soon as possible (ie a 15 year mortgage) in order to keep it moving, working, and earning for them.
They’ll even entice us by offering gifts for our deposits and they promote like crazy just how convenient it is to deposit our money. You’ve seen the recent TVcommercials about the new technology for ATM deposits. Isn’t it ironic that they also make us rely on credit scores which are a directly determined by just how quickly we pay them back?
If we apply this defining moment to our everyday lives the lesson becomes more and more apparent. By taking a look at the country’s savings rate, there’s no doubt that our ability to hang on to today’s money, the money that has the most buying power, is dwindling.
In reality more of our dollars are going to someone else in the form of debt payments, taxes, and other financial transfers more than it’s working for us. The ability for Americans to save “today’s” dollars has all but diminished.
The traditional approach must change, and the sooner the better. What is really needed is more financial literacy. It is so important to understand that “your money will never be worth more than it is today.” And equally important, how it may impact your thought process in your everyday life.
If you do, then maybe you’ll question the various strategies recommended to give your money as soon as possible to other entities. Even if it means incurring some more interest expense.
Kelly O’Connor – firstname.lastname@example.org