The question of Collateral

Continuing our journey to find the perfect investment (See questions on page 2), let’s discuss question 10 about collateral. Would the following be of interest using a savings account? Does your savings ac­count have this feature?

Let us assume that you have worked hard and accumulated $50,000. You see a spe­cial at a corner bank for five year Certifi­cates of Deposits. The interest rate is 5%. You quickly park and go into the bank to set up an account with them. You are feel­ing good that your money is safe and will grow at a competitive rate of return.

The following weekend you go on a short out of town trip with your family. Upon your return you notice some water dam­age to the basement. You heart sinks when you hear the cost of repairs is going to be right at $50,000. To add insult to injury you hear from your insurance agent that you homeowner’s policy will not cover the loss.

Your breathing eases slightly when you re­member that you own a $50,000 CD down at the corner bank. Instantly you think to yourself, I can just cash that CD in and get the basement fixed. (Did you notice that the thought process was an either/or mentality? You can have the CD or get the basement fixed.)

Upon arriving at the corner bank you announce that you want to cash in you 5 day old CD. The teller explains that there will be a $1800 dollar charge for fees and penalties. This does not sit well with you so you demand to see the branch presi­dent. As you come into my office I can see that you are upset. You go through the whole story and tell me the awful things that have happened and how I should care about you and your plight. To you sur­prise, I seem to really pay attention.

When you finish your story I ask you to close the door to my office. In a lowered voice I begin telling you that I cannot do much about the fees and penalties. How­ever, I can share with you a simple concept that very few people understand. The first thing I explain that you should not have the either/or mentality. You should be trying to figure out a way that you can keep the CD going and get your base­ment fixed, avoiding the $1800 in fees and penalties. I propose to you that you take a non-recourse loan from my bank for $50,000 using the CD as collateral. The only thing that can happen if you default on the loan is that the bank will keep your $50,000 CD. In other words, we’ll take your CD as collateral.

You agree that is a good idea and we draw up loan documents. I explain that it is fair for the bank to charge you 5% on your loan since the bank if paying you 5% on your CD. You think about it a minute and agree since the interest rates are exactly the same, the deal will be equal for both sides. I also propose to make the loan duration 5 years just like the CD. I get a cashier check made up while you review and sign the documents. After everything is complete you head for home thinking I am the kindest banker you have ever met.

Then reality sets in, especially when you explain to your significant other what you have done. You realize that what you have done is borrow money. Money that must be paid back with interest. In fact, after looking at the loan documents that plainly state the monthly payment will be $944 a month for 60 months. Doing the math (944 x 60 = 56,640) you realize that you will be paying the bank $6,640 in interest over the five years of the loan. Grumbling to yourself you say I can either bite the bullet now and pay the $1800 in fees and penalties or I can do as the rotten banker has convinced me an pay $6,640 in inter­est over 5 years.

“A secret? You are going to share with me a secret that few know about?” you yell as you enter my office. “Or do you mean very few are stupid enough to do?”

Smiling, I calmly say, “I figured you would be back. You want to know what is the big deal about paying the $6,640 in inter­est to the bank? Why don’t you just pay the $1800 in fees and penalties and be done with this mess?” Then I add, “But, you must remember the CD. You have a $50,000 CD for those 5 years compound­ing at 5%.”

“Oh yeah so the bank is going to pay me $6,640 in interest while I pay the bank $6,640 in interest. We did talk about that being a wash. What I pay you, you pay me. Maybe this is not such a bad deal after all.”

I wanted you to go through this thought process so you can better grasp what you are learning. The truth about this situa­tion is that you are going to make money. Make money? Yes. Your CD when it matures in 5 years will be worth $64,168. While you are making interest payments to the bank of $6,640 over the next 5 years, the bank will be paying you $14,168.

“Wow, that is amazing,” you exclaim. “I thought the bank would be paying me the same I would be paying the bank. Is this for real?”

Can this be a reality with the type of ac­count you have? Call me and find out. Hopefully this story will cause you to think seriously about some of the ques­tions on our list. (The ideal investment: http://financialfreedomrestored.blogspot.com/2013/10/12-characteristics-of-ideal-investment.html)  More importantly, I hope it will cause you to ask some additional ones about your plan for wealth creation.

To Control Or Be Controlled!

You want control.  Control of your life, your money, your thoughts, your wealth, your appetites, your desires and passions, etc.  Control is the thing.  It is prudent to keep the main thing the main thing.

The late statesman H.I. Mencken wrote, “The urge to save humanity is almost always only a false-face for the urge to rule it.” So beware of those who proclaim they have the ideas, techniques, or products that will save you or your financial future if you give them control over your money.  On the contrary if you can find someone that wants to empower you by teaching you about ideas, techniques or products that you can then use, you have found someone you should stick with.

Kenny Rogers’s old hit song “The Gambler” hints at the main thing when he sings, “You got to know when to hold them, know when fold them, know when to show up, know when to walk away and know when to run. You never count your money when you’re sitting at the table. There’ll be time enough for counting when the dealings done.”

The big idea “The Gambler” is trying to teach is self control vs. being controlled. Yet, today as Robert A Sirico stated; “Most intellectuals in the world are aware of what socialism did to Russia. And yet many still cling to the socialist idea.” Of course socialism is first and foremost the scheme to propagate fear so that central control (greed), can regulate society. This is the very opposite of what made the American experiment so explosively successful; creating more wealth in 100 years than had been created in more than 6000 years of human civilization.

So what in the world happened? Simply this, too many individuals forgot that serving yourself is a good thing. As Zig Ziglar states, “You can get everything in life you want if you’ll just help enough other people get what they want. The brilliant economist Ludwig von Mises wrote, “Under capitalism everybody provides for their own needs by serving the needs of others.” Who needs a central body of “do-gooders” telling each of us what our neighbor needs. Isn’t it you and I who see them every day? Aren’t we the ones who can relate with them and find out if they need food and clothing today or just a friendly face in their lives? Do we really need central planners controlling what we can and can’t do for and with our neighbors?

Let me give you an example.  I have a good friend who is a doctor.  In 1986 he had the luxury (and often did) gift his services to a patient that he could see was in desperate need of his medical training.  But after 2001, if he gave his services away to one person in a specific group called Medicare and charged another person in that same group; my friend would have committed a federal offense and in danger of fines, penalties and yes jail time. The central planners have dictated that if he gave services away to one in that specific group then all members of that group would need to receive that service for free too. Who was my friend to think that he was smart enough to identify the real needs of any of his patients? If the truth be known, this centrally devised policy, only serves the policy makers and not the individuals the policy was supposedly designed to serve. How can denying needed care to an individual help individuals?

Financial and banking regulations are really no different. Central regulations and monetary policy effect each and every financial transaction made today. How can such central planning really help individuals? They can’t help individuals anymore than denying the right to a Medicare patient to receive care can help anybody. Can’t help anybody except the central planners.  And how does it help the central planners? By giving them power, power over the lives and livelihoods of others! This is always a scary and chilling thing because as Frederic Bastiat stated; “The State is the great fiction by which everybody tries to live at the expense of everybody else.” And eventually this mindset, if it progresses, will destroy a society, country or even an entire world.

Because of our lack of financial education, a chief aim of this column, we are becoming less and less in control of ourselves and our finances.  A person who is a debtor to a creditor does not have much autonomy when it comes to the amount owed.  The debtor must pay it back and rightfully should. We cannot think we can live at the expense of everyone else and have no personal responsibility.

 Keep reading to be financially equipped to be in control instead of controlled.  But as teaser, you have to take control of the financing and banking function in your life.  Someone is always going to do that task, either yourself or you will abdicate it and while the other person does it for you, they make the money NOT you.


You can also visit www.financialtailwinds.com or contact me directly jason@financialtailwinds.com