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Missed Fortune – Where We Accumulate Money Matters More Than We Think

Posted on | July 8, 2013

Getting Our Minds Around Money

There are a couple of places where Americans tend to accumulate their money. Real estate is the first. For many people their primary real estate is simply the home they live in, though many choose to own real estate for other purposes.

The second place where Americans commonly accumulate money is in retirement savings vehicles; most often IRAs or 401(k)s.

What a lot of Americans don’t realize is that these particular methods of saving for retirement effectively defeats their purpose. It’s like trying to drive down the freeway with one foot on the gas and their other foot pressing on the brake.

Most are oblivious to what they’re doing, both before and after retirement.

What if there was a better way to move you swiftly toward the brighter future you’ve envisioned? How soon would you want to know about it? Most of us would say, “Just as soon as possible.”

Often people don’t recognize they’re making mistakes because they don’t fully understand how money works. Anytime you deposit money in a bank, a credit union, or an insurance company, there are pretty much four things you can do with it. You can spend it, lend it, own something with it, or give it away.

Banks borrow money from us when we put it into the bank in savings. In return they pay us maybe 1%, if that. This means that for every $100,000 dollars we deposit with them they’ll pay us $1,000 in interest. It takes a long time to add up at that low rate.

On the other hand, the bank is loaning money out to other people; say for a mortgage, and charging them 4%. On a $100,000 mortgage that means the bank is making $4,000 in interest compared to the $1,000 they’re paying you for saving your money with them. That’s 400% greater than what you’re getting paid. Now do you see?

What if you were able to put these same principles to work in your life? What if you could borrow money at four percent that gave you a predictable rate of return of eight percent? You’d be creating the same kind of predictable rate of return that a bank does, but that money would be working for you.

A Mortgage Strategy That Works

3 finance professors at a major university were asked about the topic of a 15 year amortized mortgage. Each professor admitted to regularly counseling students to purchase their first home using a 15-year mortgage instead of a 30-year mortgage.

Many financial advisors recommend this, but they’re assuming that the only way that people will pay off their homes is if the mortgage company is threatening to take it away.

This is a position advocated by many financial advisors, but it operates from the notion that people will only pay off their homes is if they think the mortgage company is threatening to take it away from them.

These professors sincerely believed that by paying a higher principal and interest payment, a person would have their home paid off in 15 years and then be able to sock away what they would have paid in additional interest.

What these professors hadn’t realized was that when considering the differential between the 30 year amortized payment, which is less, and the 15-year payment, which is higher, a person could actually do much better. This is because when the differential is combined with the tax savings achieved during the first 15 years of a 30-year mortgage, that money could be socked away in a conservative side fund earning a predictable 8 or 9% rate of return. This way the money remains liquid, but continues to work for you.

When shown the math, the professors were shocked to recognize that this method could produce enough income to completely pay off the 30-year mortgage in only 13.5 years. Keeping real estate equity separated from your mortgage is a proven strategy to enjoy liquidity, safety, and a predictable rate of return that allows you to get out of debt sooner.

The extra money that can be accumulated by not paying off your mortgage can easily swell to an extra million or two million dollars over the term of a standard 30-year mortgage. That’s letting the money work for you.

Learn how to get yourself pointed toward that brighter future by visiting with a wealth architect today.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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