Banking Interest Rates
How does it work…to benefit you?
Interest rate works both ways on a decreasing balance (amortized) and on an increasing balance (Compounding) at the same time. What??
Everything you do is being financed, either by your own money or by an institution such as a bank, in the form of loans, mortgage, etc.
In an example of purchasing a $30,000 car in Jan 1 2009 @ 5%/annum, paid off in 5 years;
$566.14 - Monthly Principal & Interest
$33,968.22 -Total of 60 Payments (all gone to the bank)
$3,968.22 - Total Interest Paid
While on the receiving end (the Bank) making a mere 4% yearly on your repayment
Year 1 - $566.14×12x1.04 = $7,065.43
Year 2 - ($566.14×12 + Year 1) x 1.04 = $14,413.47
Year 3 - ($566.14×12 + Year 2) x 1.04 = $22,055.44
Year 4 - ($566.14×12 + Year 3) x 1.04 = $30,003.09
Year 5 - ($566.14×12 + Year 4) x 1.04 = $38,268.64
So go figure…The power of compounding interest vs amortized.
The bank in the end makes more money from you though earning at a lower interest rate.
Now imagine you having your own “Bank” in this situation. You lend $30K to yourself at 5% to buy the car and then you pay yourself back $566.14 monthly into your own “Bank” that earns 4% a year.
At the end of 5 years, you made $4,300.42 (by the way, it’s tax free) on your repayment sum, and that’s a 14.3% / 5 years = 2.9% return a year to yourself while you drive a new car? Can you say its great to have your own bank, and is it legal & is it possible? Absolutely and absolutely.
Learn more in my next workshop in Bellevue (Date TBA) on ‘How to become your own banker’. Write to me if you need to be posted.
Plus, if this loan was structured as a finance to your business as a car “lease”, you can write off the whole thing towards your taxable income. I believe I just saved you some more money there.
Now why haven’t your MBA or Finance school teach you that? Have your CPA talk to you lately concerning strategies that would help you keep most of your own money? What about your financial planner?
Always do the math. If your map doesn’t agree with the ground, your map is wrong.