In the last post, we left you with the question…
What’s the current interest rate on a savings account?
It’s 0.09%. Don’t believe me? Let me google that for you.
What do the Banks do with your cash?
Well, we established that they give you 0.09% interest, which is nothing. However, they take the cash you leave with them in your “checkings” or “savings” account and in turn, they LEND YOUR CASH to others as loans.
When it comes to mortgages, the banks just take your cash and lend it out at 4% or greater interest rate.
When it comes to car loans, the banks just take your cash and lend it out at 6% or greater interest rate.
When it comes to credit cards, the banks just take your cash and lend it out at 20-24% or greater interest rate.
Is that a better return for the bank than your 0.09%?
How Credit Cards Make Money For The Bank
They LOAN YOU money, and then they charge you 20-24% for late payments. You LOAN them money UNDER THE IDEA OF “SAVING” and you charge them 0.09%. Then the bank comes back and loans you back your money and if your payments are late, you pay 20-24%.
This is how the credit card scheme works. Pretty great, eh?
Here’s how it works:
The bank loans you money through a “credit card” that you use to make a payment on a product or service. You will accrue a balance and you’ll be expected to pay off that balance at the end of the billing period (i.e. 30 days or something). If you don’t make the payment and have a balance outstanding, then you’ll be charged a fee in the area of 20-24% interest.
The average interest for credit cards is 15%. Mine is 20-24% for some reason. I should renegotiate that.
Basically, the bank is loaning you money for 20-24% through credit cards and you’re loaning the bank money through a savings or checkings account at 0.09%. Does that sound fair? That’s how the bank makes money.
Oh, and they run the same scheme with mortgages and car loans.
Who’s winning in this game? The bank.
If you want to learn how to win against the bank, then be sure to subscribe to our newsletter. We’ll teach you how you can use credit cards to your advantage.
Why Not To Save Money
Save money. Save money. Save money! That had been fed to us since we were babies. But you know what? Saving won’t make you rich! I’ve already proved that. You won’t earn anything at 0.09% interest. But, why do people save then? There are several reasons.
First Psychological Reason of Why People Save
Safety. It’s a valid reason. I like having cash in my checking account. I’m aware it’s not earning any interest, but I like being liquid and just having some cash to pull out easily. If anything happens that requires cash (rarely happens), it’s there. I don’t have to liquidate (or sell) my investments because my investments are there for the long haul. It does not get touched UNLESS it’s an emergency.
I always have around 5-10% of my net worth in my checkings account. So, if my net worth is $100K, then I’ll have around $5-10K in my checkings account. $90-95K is invested.
Second Psychological Reason of Why People Save
Easy access. Like I said, it’s easier to just go to your ATM and pull cash out when you need it.
Third Psychological Reason of Why People Save
You “THINK” your money is GROWING…
Which Leads us to Why Not to Save Money Because…
… IT’S A PSYCHOLOGICAL TRAP. At 0.09%, do you really think it’s growing?
Rule of 72 Formula
How many years does it take to double your cash?
Here’s the formula to calculate that:
72 ÷ interest rate = Years to Double
Rule of 72 Formula Examples:
72 ÷ 4% = 18 years to double
72 ÷ 8% = 9 years to double
72 ÷ 12% = 6 years to double
So, if you invested $1,000 at 12% interest rate, it’ll take 6 years for it to double to $2,000.
If you invested $10,000 at 8%, it’ll take 9 years to double that to $20,000.
How Long Does it Take Credit Card Companies to Double Their “Loans”?
72 ÷ 20% = 3.6 years to double
72 ÷ 24% = 3 years to double
If you got credit card debt, pay off the one with the HIGHEST INTEREST RATE first!
Write down this strategy:
Pay off the credit card with the highest interest rate FIRST because it’s that credit card that is KILLING YOU. If you have multiple credit cards and multiple balances on each credit card, ALWAYS PAY OFF THE ONE WITH THE HIGHEST INTEREST RATE FIRST. After that you pay off the second and third highest.
The caveat is that if you have a credit card that you can pay off the entire balance, then CLOSE THAT OUT FIRST. That takes priority because then you won’t have to pay interest on that credit card. Do this EVEN IF the interest rate is LOWER than the others. CLOSE IT OUT!
If you need your credit repaired, first sign up for our newsletter and then just reach out and we’ll see what we can do for you. Unfortunately, this service is only for Americans right now (I don’t have any networks outside the USA yet).
I’m going to give you some benchmarks because when I started investing, it was difficult. I didn’t know what the average benchmark or return is to compare against. So, here are my personal benchmarks that tell me how I’m doing generally.
Disclaimer: These are loose benchmarks, take them with a grain of salt because they are based on what I’ve observed. As you learn more and expand your network, your benchmark should go higher. For example, the wealthy have the capability to get outstanding returns that is exclusive to them. That’s unfair I know, but it’s just how the world works.
Benchmarks differ between asset classes that have different risk levels. For example, stocks generally have a better return than bonds because of the risk involved.
REITs – Real Estate Investment Trusts (I get around 5% and I think that’s a good deal)
Mutual funds – There are so many (Generally, I get 5-8% and I think that’s a good deal for now…)
I have a portfolio of mutual funds giving me 15% in Canada. THAT’S AMAZING! My advisor had also told me that those portfolios exists in the USA too – that returns 15, 20, 25%+, but it’s only for people of a certain net worth (i.e. 100K+). If you want in on this, be sure to subscribe to our newsletter.
Of course, the mutual funds getting me 5% are a conservative mix between stocks and bonds. So, they’re more secure and I’m happy with that.
I’m Not A Financial Advisor
I just wanted to make another disclaimer. I’m a CLIENT, not an ADVISOR! But if I’m doing a good job educating you, I might consider a job switch. Hahahaha. I don’t pick my own funds and stocks.
I invest in a TRUSTWORTHY FINANCIAL ADVISOR and they DO IT FOR ME, but I still do my homework and learn as much as I can so I can understand. It’s still MY MONEY AND MY RESPONSIBILITY.
Fortunately, my advisor loves to educate and I ask him a shit ton of questions and that’s how I got to my level of knowledge now (plus, I actually read a lot of personal finance and investing books).
How Do Financial Advisors Make Money
Most financial advisors get like a 1% commission from your investment balance. That’s why they are willing to educate you for free and be your advisor. If they are managing $10,000,000 amongst all their clients, then 1% of that is $100,000 per year. Not bad, eh?
My advisor gets like $0.35 off of $1 of my investment. So, it’s like 0.35%. It’s not worth it, but he likes to educate and I don’t need a lot of maintenance, so I guess it works. Come to think of it, I have like $40,000 invested with him and 0.35% of that is $140 per year. Not much. But this is only one product of his business and it’s in the lower tiers.
If you want to know more about the structure and how all this works, then subscribe to our newsletter or shoot us a message.
If you are in any other industry and are NOT financially aware or educated yet and you want to get started, find someone that you trust and work with them! If you have any questions let us know and we’ll try to help. It’s what we’re here for!
Find someone that is willing to educate you. Find someone that is open about how much money he or she’ll make off you from fees, commissions, etc. it’s really important to feel the vibe. Feel if they have your best interest at heart and are someone you can trust.
When it comes to money and investments, those are taboo topics that people don’t talk about. But, how do we learn about something we don’t talk about? *scratch my head*
All the advisors I’ve done business with had taken the route of education first before doing business and that’s a strategy that I like a lot!
They taught me how money works and how to use other people’s money, which I’ll teach you at some point, you’ll get a notification if you join our newsletter, so make sure you do!
Your advisor should really be like family. If they aren’t willing to help you hide a dead body, then they probably aren’t your guy or gal.
That’s all for today Coursehacker, see you next week!