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Missed Fortune – Why It Pays To Know How Money Works

Posted on | June 10, 2013

The Right Information Makes All The Difference

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.

These professors honestly believed paying the higher principal and interest payment would help a person pay off their home in 15 years. Then, it was assumed, they could sock away what they were no longer paying in additional interest.

What these professors didn’t realize was that by looking at the differential between the 30-year amortized payment, which is less, and the 15-year payment, which is higher, a person could do much better. When the differential is pooled with the tax savings achieved during those first 15 years of a 30-year mortgage, that money could be saved in a conservative side fund and earn a predictable 8 or 9% rate of return. That way the money could remain liquid, but still continue to work and grow.

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 unnecessarily can easily swell to an extra million or two million dollars over the term of a 30-year mortgage.

Time Is Too Precious to Waste

Most Americans tend to accumulate money throughout their lives in one of two places. Real estate is the first one. For many people their primary real estate is the home they live in, though some choose to own real estate or investment properties for other purposes.

The second place where Americans accrue money is in a retirement savings account. More often than not this would be an IRA or 401(k).

What most Americans don’t realize is that clinging to these methods of saving for retirement, they’ve been sabotaging their success. It’s the equivalent of trying to drive down the highway with a foot on the gas and the other foot pressing on the brakes.

Most often, they aren’t aware of what they’re doing, either before or after their retirement.

What if there was a better way to move you steadily toward your brighter future? How soon would you want to know about it? A prudent person would say, “Just as early as possible.”

Often people don’t recognize they’re making a mistake because they don’t quite understand how money works. Anytime you deposit money in a bank, a credit union, or an insurance company, there are basically four things you can do with that money. 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.

But the bank is loaning that 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. Get the picture?

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.

Learn how to make this a reality 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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