In my article last week we talked about 3 of the 4 massive wealth drains that are causing you to needlessly give your money away to others every month. This week is the fourth massive wealth drain and it is one that is bigger than the other three and yet almost nobody has a solution to how to reduce or eliminate it in their lives. Stay tuned in coming articles for solutions to these wealth drains but we needed to identify them first before we attack them at their source. The last massive wealth drain is…
The biggest wealth stealer that almost nobody talks or writes about is depreciation. Almost everything we ever buy in our lifetime experiences massive depreciation. Two years ago you bought two beautiful business suits and spent $800.00 for them. What are they worth today assuming you wore them even a little? Assuming you could find someone your size, would they give you anything for them if you tried to sell? Would you try to sell? How about the pair of shoes you bought to match and shirts, ties, scarves, bags, etc. that you bought to really have a couple of beautiful outfits you could be proud to wear? Let’s assume you spent $1,500 for all of these things and now they would be worth $300.00 if you sold them today. Most of us will not sell them but will wear them into the ground or let them sit and die inside of our closet until we give them away hoping for some kind of tax deduction.
That original $1,500 is now gone, plus any interest we might have paid if we bought these things on credit, may still be owed. This is the nature of spending money on consumer items and of course we all need clothes, food, and other essentials. I have clients tell me sometimes they don’t know where their money goes. Most do know where it goes but they have never really thought about depreciation on all the items they buy. Of course, we can’t totally shut down depreciation in our lives but we can give it a run for its money and especially on large ticket items such as cars, boats, jewelry, and other bigger ticket purchases.
Most of our wealth gets spent on consumer items and then lost through depreciation. The more items we can reverse that trend during ownership the more money we have for our families. The only way to stem some of this tide is to make a commitment to be the bank and “loan” yourself money on any consumer item over $10,000. If you accept the loan as the consumer you make a rock solid commitment to yourself that any loan accepted from yourself will be repaid with interest and in full. Pick a reasonable payback time and set up your own amortization schedule (loads of free amortization schedules available on line but here is one you can use from Calculator.net) for payments. If you borrowed the $10,000 you must use interest volume and velocity to recapture the depreciation you will experience on the item. In my first book “The Perpetual Wealth System” I discuss these principles at length; for this article I will be brief.
What is interest volume?
Very simply put interest volume measures how much of every payment is going toward interest (normally to an outside bank) and how much of that payment is going toward debt pay down. The pay down part helps your net worth the interest part helps the bank’s net worth. You just closed on a new home with principal and interest payments of $1,000 over 30 years. If your interest rate on the loan is 6% that does not mean your interest volume is 6%. Your interest volume in the early years of this loan is close to 90% and shrinks over time as you start to pay down the original loan balance. So you and I could have the same payment and interest rate but very different interest volumes due to the age of our loans. This is why you should not be in a big hurry to refinance everything all the time. The refinance boom of the last 20 years has made mortgage originators and banks wealthier but the average American is in more and longer debt than ever before.
Interest velocity is nothing more than the speed of money. Velocity is not unique to money and is critical in any business. If you have ever waited tables you know velocity all too well. If you had a section of 8 tables during the night and you could turn those tables over 3 times instead of two times would you make more money in tips that night? Of course you would because that would mean you get paid on 8 more bills.
Interest velocity is nothing more than how many times can we lend out the money to ourselves or others and collect new fees and set up another revenue stream to our personally owned bank. You will learn about private lending in an upcoming article but for now remember this simple fact. If you could loan money out and get paid two origination points up front every time, would you want to loan that money three or four times during the year? The answer is an obvious, four times because you pick up thousands of more dollars in fees.
A centuries old business model
Banking and financing have been around in some form or fashion for thousands of years. If you could bring your oxen into the temple you could get a loan out on it for a fee. Any business model that has been around for that amount of time is obviously a killer business model and has created untold fortunes for the bank owners. Our problem as a society is we have only ever been trained to be the borrower and not to be the lender. The owners of banks understand volume and velocity but I know very few people reading this article have ever been exposed to how banks have been making money for centuries.
Now is your time to understand that there is a fortune in using a pool of money just as bank would and put volume and velocity on your side in your wealth creation efforts. You will use this strategy to stop the four wealth drains above and grow and protect wealth for you and your family.
More about becoming your own bank next week so please stop by next Thursday for the new piece.