When you think of building wealth, how do you envision doing so? Do you imagine scratching off the winning numbers to a state lottery? Are you about to get paid on a patent from Apple Inc. for some new screen development? Or do you envision working your way up the corporate ladder to the C-suite of a large corporation?
Sometimes people only look at things in one dimension. Wealth happens to be one of them. But did you ever stop to think that building wealth actually happens in two dimensions: 1) making money on what you own, and 2) paying less on what you borrow.
This is a timely subject as interest rates continue to drop to new historic lows. This also presents an opportunity to capitalize on low interest rates while they are available. Here’s an example of how two hypothetical people with the same assets and liabilities could have such different outcomes.
Let’s say ‘Mike the neighbor’ owns a home, has 3 credit cards, a car loan, a time share loan, and a personal loan from Uncle Buck. Let’s further break down the monthly cost of these hypothetical liabilities:
- $500,000 mortgage at 5% interest…or $1,667/mo. for JUST THE INTEREST
- $15,000 of credit card debt at 14% interest…or $175/mo. for JUST THE INTEREST
- $40,000 car at 3% interest…or $100/mo. for JUST THE INTEREST
- $28,000 time share loan at 5.5% interest…or $128/mo. for JUST THE INTEREST
- $10,000 loan from Uncle Buck at 5% interest…or $42/mo. for JUST THE INTEREST
That means that ‘Mike the neighbor’ pays $2,111 a month (based on these initial values) in pure interest charges towards the items or indulgences he has, or is, enjoying. Not one penny of this payment goes towards lowering the amount he owes. In other words, he has not reduced his principal amount at all with this payment.
Then there is ‘Savvy Nancy.’ She has the same exact liabilities as Mike, but pays lower interest rates. Hers are:
- $500,000 mortgage at 3.25% interest…or $1,354/mo. for JUST THE INTEREST
- $15,000 of credit card debt at 9% interest…or $112/mo. for JUST THE INTEREST
- $40,000 car at 0% interest…or $0/mo. for JUST THE INTEREST
- $28,000 time share loan at 3.5% interest…or $82/mo. for JUST THE INTEREST
- $10,000 loan from Uncle Buck at 3% interest…or $25/mo. for JUST THE INTEREST
With Savvy Nancy’s better credit score earned through a responsible history of borrowing, and the fact she diligently shops around for the best rates, she pays $1,573/mo. for the same exact items as Mike. However, she is keeping an additional $538/mo. in her pocket due to the lower interest rates.
Because Savvy Nancy knows that she has an extra $538/month, she begins to invest it each month into a moderate risk investment account that she expects to average a 5 percent annual return on. Compounding her interest and contributions over the next 10-years, she expects to have around $83,000 saved up.
The point here is that people often look only at the returns an investment could possibly provide. They only focus on the cost of the investment, the cost of using an advisor, or being wary of the market’s unpredictability. While some of these points are warranted, many times an investor has more control over the liabilities, expenditures, and contracts they sign that can and do affect their wealth building efforts. This one-dimensional view is common, and quite often, an overlooked calculation when taking a comprehensive look at one’s finances.
At Arktos Wealth Management, we review both your assets AND liabilities to ensure you are maximizing returns based on your risk level, and paying the least amount you have to pay on your purchases (large and small). Many people around you may be looking for advice that covers more than just investment returns, but don’t know where to turn. And many more people may be pinching pennies due to a recent layoff or work reduction caused by the pandemic.
We are here to help. This is the time to let your friends, neighbors, and co-workers know that a friendly advocate is here in this time of need. To be able to confidentially discuss your investment, tax, estate, insurance, or liability issues with someone who can provide the guidance needed, we are here for you. Arktos Wealth Management isn’t just a trusted name in our community; it’s a resource we have built over the last 14-years so our clients can enjoy living life to the fullest. Let us know how we can help.