Banking Principles to Eliminate Debt and Create Wealth3 min read
Banking Principles to Eliminate Debt and Create Wealth
Banks have your money working hard for them. You see, the banks want you to keep your mortgage and other loans separate from your checking and savings accounts. Why would they want you to do this? The answer is really simple: because they want to make as much money as possible on all of your accounts.
Remember, banks make money by lending the money in your checking and savings accounts to other borrowers. Conversely, they make money by lending the money from other people’s checking and savings accounts to you. In other words, they make money by lending your own money back to you with interest.
Keep this game in mind as we go through important banking principles that can eliminate debt and create wealth to turn the tide and have your money working for you.
Principle 1 = Open-End Loans
An open-end loan is a revolving line of credit issued by a lender or financial institution which is approved for a specific amount. It is very flexible, meaning you can take out as much or as little as you need up to the amount of your credit limit, and once you pay off that amount, you can reuse the line of credit again later. Examples of open-end loans are credit cards and a home equity line of credit, or HELOC.
Principle 2 = Closed-End Loans
Closed-end loans are dispersed in full when the loan closes and must be paid back, including interest and finance charges, by a specific date. These types of loans are referred to as “installment loans” or “secured loans.” Closed-end loans allow borrowers to buy expensive items–such as a house, a car, a boat, furniture, or appliances and must be paid on schedule or penalties and fines are imposed.
Principle 3 = Interest Cancellation
Taking a mortgage as an example, the less you owe on your mortgage balance, the less interest you pay. Wouldn’t it make sense to try and find a simple way to lower your mortgage balance in order to pay less interest and reduce your number of monthly payments? Obviously, the answer is, “Yes!” So, the next question you may ask is, “Where do I get the extra money to lower my mortgage balance so that I can pay less interest?” The answer to that is where the excitement begins!
Principle 4 = Float and Leverage
Leverage is the use of debt (borrowed capital) in order to multiply the potential returns from another investment or undertaking. Many companies use leverage to finance their assets. In other words, instead of issuing stock to raise capital, companies can use debt financing to invest in business operations in an attempt to increase shareholder value. Consumers can use float to earn interest in a separate account while utilizing a bank’s assets to sustain their lifestyle.
Principle 5 = Strategic Payoff
If you’re like most people, you probably have more than one debt. So which debt should you make strategic transfers to first? Some people recommend that you pay off your smallest debts first, regardless of interest rate, since eliminating the monthly payment for that debt will free up more of your money to go toward other debts. Other people say to pay off your highest interest rate debt first, so that your money will have the greatest impact and cancel the most interest. Both methods have merit.
Principle 6 = Conversion
It has been said, “Those who understand interest earn it. Those who don’t, pay it.” This statement couldn’t be more true! Those who spend 30 (or more) years paying interest on mortgages, cars, credit cards, etc. are simply making the banks rich—very rich! Fortunately, those who have the right tools and understanding can also become rich! As you may already know, your money has great potential power. If you use it correctly, and with the right tools, your money can multiply almost exponentially.
By using these principles and applying them to your debt, we can show you how to pay off your debt, including your mortgage, in as little as 5-7 years, and convert your debt into wealth!
Submitted By Mike Amos
Founder and Active Contributor of millionairemindset.life