by | | The Blog
For most people, the world financial crisis has been a wake-up call. In today’s financial landscape, people need to be more frugal, more goal conscious and more financially literate.
There is no doubt that Americans have changed the way we shop and plan our household budgets. In fact, who would have ever imagined that retail outlets which feature dollar items would be among the fastest growing industries in the country? Forbes wrote about dollar stores: “In retail, cheap is the way to go. Stores that sell stuff for less than a buck are tearing it up.”
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by | | The Blog
From the moment you graduate college, the quest for building a solid financial future for many people begins. It’s been said a man’s home is his castle so let’s compare this “quest” for a solid financial future to building your financial castle. I’m amazed at the number of people I meet with who are 10, 15 or even 20 years into building their financial castle, and who unbeknownst to them have been building their castle on sand as opposed to building on a solid rock.
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This is your captain speaking. To reach our destination of getting a rudimentary understanding of life insurance, we are going to be cruising at an altitude of 10,000 feet, so go ahead and strap your seat belts. As we take off, should the thought of our destination cause you to want to throw up, there are bags in front of your seat pocket. Once we get to a comfortable altitude, I assure you any negative thoughts and preconceived notions you had about our intended destination will have completely disappeared.
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If owning a home is part of the American Dream then I guess mortgages would be one way to go about financing the American Dream. The very thing that makes home ownership possible for the vast majority in America is the same thing that everyone is so quick to want to get rid of. Can the home mortgage be that bad? Perhaps it’s the long list of financial gurus on air and in books that have pointed out how if you keep your 30 year mortgage, you could end up paying 2 to 3 times the cost of the house when you factor in the interest payments made to the financial institution. And you know what, they’re right. But the fact is – that’s not the whole story.
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Want to be the life of the party? Share a story of how you, your child or your favorite team came from behind to win the game and you’ll have the entire room’s attention. Why is that? It’s really simple. Deep down inside of us, we all love to win. If you don’t believe me, ask any fan of the Miami Heat how they would have felt if the Heat lost either game 6 or game 7 of the 2012 Eastern Conference Finals.
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by | | The Blog
Before getting into the basic wealth building formula most people use, I’d like to explain a bit about how banks and similar financial institutions work. Let’s assume for a moment that you are a business owner and I’m the bank. For every $1 you earn in your business, where do I as the bank tell you to put each $1, every time you earn one? Why, the bank of course. I tell you to deposit that $1 into my bank because I can pay you interest.
Let’s assume I am offering 1% simple interest on money market deposits and other checking or savings instruments at my bank. Now as the bank, what do I do with your $1? How do I make money? I loan it out to Becky. Becky has a financial need. She may want to buy a new home, buy an office building or even a new car.
Let’s assume she wants to buy a new home and she needs $100,000 loan to purchase the house. I, the bank, loan her a $100,000. Where do I, the bank, get the $100,000 to loan to Becky? Well, I got it from you, Mr. Business Owner, and I also got it from any other clients of my bank that have deposits in our bank. For the right to use the $100,000 to purchase her home, I then charge Becky an interest rate. The 6% compound interest rate that I charge Becky is a considerably higher interest rate than what I’m paying you, Mr. Business Owner.
The difference between the 6% compound interest rate I am making and the 1% simple interest rate that I am paying is one way I make money as a bank and it’s called arbitrage profits. And when I receive the interest Becky’s paid on that loan what do you think I do with that money? I loan it out again. Except this time, it might not be at just 6%. It might be at 18% on a credit card. Now, I’d like you to make note of this equation somewhere you can always make reference to it:
W = M x R x T.
Wealth = Money x Rate Of Return OR Interest Rate x Time.
In order to create wealth, you have to put your money on deposit with some financial institution. How long (Time) you leave this money on deposit often determines the yield, interest, or rate of return (ROR) earned on your money… which in turn determines how much wealth you create for yourself. That’s how financial institutions have taught us how to create wealth. In order to have more wealth you need to increase one or more of those variables. Put in more money, i.e. work harder and save more, get a higher rate of return i.e. take on more risk, or leave it in there for a longer period of time and typically give up liquidity, use, control and collateral capacity on the funds.
The banks and financial institutions teach you to give up the “LUCK Factor” which is liquidity, use, control and collateral capacity on your funds. Then, once you’ve succumbed to this wealth equation, you only get to do this one time. In other words, whatever money you allocate to this investment is tied up and not available for any further use. But what does the bank do with your money deposited in their banks from your business, your job or from payments on loans to them? They lend that money out over and over and over again.
Clearly this is good business for banks right? My question is might this also be good for you if you knew how to employ some of these same principles in your own financial plan? I mean what if you could maintain liquidity, use, control and collateral capacity on your capital.
What if you could deploy that capital into investments that would earn a real rate of return versus an average rate of return? What if you could employ Warren Buffet’s #1 rule of investing and avoid sustaining losses to your investment capital. What if you could put your capital to work in such a way that you benefited from financial concepts like leverage and the velocity of money?
The question I have for you then is this. If you could, would those things benefit you and help you attain financial independence more efficiently and with more peace of mind? If they would, then why aren’t you already doing those things? Perhaps you don’t have liquidity, use, control, and collateral capacity on your money.
Perhaps what you are also missing is the “K” in the “LUCK” factor….which is the knowledge of what to do with your money when you’ve been able to maintain liquidity, use, control and collateral capacity on your funds. Luckily, that is where an advisor like myself can be of service to you. In working with you, my goal would be to not only do all of the aforementioned things but to also help you eliminate all of the unintended holes in your financial bucket, so as to put you on the right path to winning the money game and achieving financial independence. It’s what we do every time we take on a new client and it’s what we’d like to do for you as well.
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