Understanding Interest Part 2
Unlock the power of understanding interest. Learn how it can either build wealth or cause financial setbacks on your wealth journey.
The Two Sides Of The Financial System
“Those who understand interest earn it. Those who don’t, pay it.”
Albert Einstein
While oversimplified, the example below illustrates one of the fundamental wealth principles behind Einstein’s statement:
Imagine a world with only two individuals, Dave and Sam. In this world, there is only $1000 in circulation.
Sam is the “money man” and currently owns all the money in this world. On the other hand, Dave is a working-class guy with no money in his pocket.
Dave borrows $500 from Sam at a 10% interest rate to be paid back over 12 months.
Dave now has $500 (the principal) in his pocket, and Sam has $500 left after providing the loan.
Over the course of a year, Dave pays Sam back the $500 he borrowed. Unfortunately, he still owes Sam $50 dollars to cover the interest. Sam, on the other hand, has the full $1000 in his bank account. And Dave still owes him $50 in interest.
Remember that there is only $1000 circulating in this mini economy, so the $50 dollars in question does not actually exist.
To solve this problem, Dave has three options:
1. Dave can ask Sam for another loan.
If Sam agrees, he will loan Dave another $500. He will again apply interest. Dave will now owe Sam $100 after he has paid off the principal. It’s easy to recognize “the dept trap” unfolding in this scenario.
2. Dave could file for bankruptcy.
If Dave files for bankruptcy, he returns to the start with no money in his pocket. He has made no financial progress, and Sam still has all the money.
3. Dave pays off the debt by working for Sam.
The only resource that Dave has at his disposal is his labor. Dave can work for Sam to pay off his debt. However, all that Dave is doing is selling his time for money, which ends up back in Sam’s pocket.
When you reflect on what is happening between Sam and Dave, it’s clear the financial system has two distinct sides: the paying side (Dave) and the receiving side (Sam). Once you can identify the paying and receiving sides of the financial system, you are closer to understanding interest.
Dave represents millions of hard-working middle-class Americans who spend their lives handing over their hard-earned cash to the very few who know how to earn interest instead of paying it.
Four Types Of Investors
Based on his many years of experience guiding people through their financial journeys, George Antone divides investors into four groups, depending on their mindset when it comes to interest:
The Payers: Those who borrow money make ends meet and end up in an endless loop of debt.
The Receivers: Those receiving interest can build wealth, but they must consider many other factors, such as taxation and inflation to truly succeed.
The Avoiders: Those who see interest as the ultimate enemy of wealth and avoid debt at all costs. Unfortunately, avoiding all debt means avoiding many opportunities to build meaningful wealth if you know how to use debt strategically.
The Strategists: Those who understand interest and know how to implement the strategies needed to reach their lifestyle goals.
Which group do you fall into, and how does that affect your financial journey?
If you are ready to set out on your wealth journey and achieve your goals faster, safer, and with more certainty, join us for our upcoming workshop in 2024:
