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Missed Fortune – What You Wish You’d Known 20 Years Ago

Posted on | May 27, 2013

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The Two Places Most Americans Accumulate Their Money

There are two primary places where most Americans tend to accumulate money throughout their lives. 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 for other purposes.

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

What most Americans don’t realize is that by following these methods of saving for their golden years, they’ve effectively been defeating their purpose. It’s like they’ve been trying to drive down the freeway with one foot on the gas and their other foot pressing on the brake.

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

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

One of the reasons that people don’t realize that they’re making a mistake is because they don’t understand how money works. When you put 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 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.

Why The Well-Informed Do Things Differently

During a meeting with 3 finance professors at a major university, the topic of a 15 year amortized mortgage came up. These professors admitted that they regularly counseled their advanced students to buy their first home using a 15-year mortgage rather than a 30-year mortgage.

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

These professors sincerely believed that by paying the 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 amazed to see that this method produced enough money to completely pay off the 30-year mortgage in just 13.5 years. Keeping your real estate equity separated from your mortgage is a proven way 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 generated by not paying off your mortgage unnecessarily can easily amount to an extra million or two million dollars over the course of a 30-year mortgage.

Think about what that extra money could mean to your family when you’re gone.

If you’re ready to learn more, contact 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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