Dear FutureMoneyTrends.com Member,
Albert Einstein once said,
“Those who understand interest earn it; those who don’t, pay it.”
As prudent stewards of our money, many of us have learned to focus on interest that’s paid. This is the interest rate on any debt, and ultimately, how much interest you will pay at the end of the day. But that is just half the story. To understand interest, you can’t just be a master at avoiding it.
Where the true understanding part comes in is also seeing clearly the interest that is potentially NOT being earned. This one is more difficult to see. Let’s say, for example, you want to buy a car today. At first glance, it appears you have 3 options.
- Pay Cash
Paying cash seems like the obvious choice if you’re trying to avoid paying interest, but what if you’re not just trying to avoid paying interest, but you are also focused on earning interest? Remember, Einstein talked about those who understand interest earning it, and not avoiding it.
If I have $30,000 saved up, I could use it to buy a vehicle. That money is now gone. Sure, I have a car, but there is an enormous cost doing this: the opportunity cost, or the loss of interest that could have been earned. Let’s go over two alternative scenarios, where you act as a bank, rather than a consumer.
$30,000, instead of buying a car, is used to purchase income, a dividend-paying stock like BP, who has a current yield of 6.5%; an income-producing property; or any asset that cash flows. Instead of buying a car with cash, which may feel good, it won’t make you any wealthier. We instead finance the vehicle at a lower interest rate, or even the same rate of interest you are receiving from your asset. Because remember, if you are earning 6.5% and paying 6.5% in interest, it is NOT a wash. The debt you are servicing is going down and is eventually paid off.
Depositing the $30,000 in a specialized whole life insurance plan. This means compounding your savings with a guarantee, and then to top it off, banking on your own policy. Life insurance companies allow you to use your own cash as collateral. You can easily borrow the cash back in order to buy the vehicle, but instead of having that money be gone, it’s actually safe inside of an insurance policy that will pay you a dividend, earning you a tax-free return about 5x higher than a CD will today.
Dual Compounding Strategy
What if it wasn’t a car you were buying? What if it’s a rental property? Or a dividend paying stock… or a high-yield fixed income asset? The next time you pay off debt or make an all-cash purchase, consider the potential interest that money could be receiving. Right now, in a super-low interest rate environment, one that will last at least until the 2030s, in our opinion, the opportunity to arbitrage couldn’t be better.
Editor’s Note: To learn more about a dual-compounding strategy, visit FutureMoneyTrends.com/Secrets-of-the-rich