You finance everything that you buy! Why not earn the interest rather than pay it to someone else?
Matthew 25:26—...you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.
The parable of the talents in the gospel of Matthew holds both spiritual and financial lessons. I don't know how many times I've read it only considering the spiritual meaning.
Then I came across Ray Poteet's insight about the passage. (Ray Poteet is my mentor and the founder of Living Wealth. Get Ray's free e-book The Tree of Wealth here.) In one of Ray's lessons he suggested that the master in the parable might have been saying, "You lazy servant, you stopped my money from flowing! The least you could have done is kept it moving."
Movement is a natural law of Creation that is always at work around us. Remember the water cycle? Thermodynamics? The circulatory system?
Rivers must flow or they become stagnant.
Heat energy must flow or life would be impossible.
Blood must flow to bring life-giving nutrients.
Money is no different—consider financial terms like "currency" (like a river current) and "liquidity". There is one pool of money in the world, and it is always flowing. Wherever it flows it creates opportunities. Financial institutions recognize the money they lend us could be flowing in another direction and creating other opportunities, so they charge us a fee to borrow money. We're all too familiar with the fact that any time we borrow money from a bank, a credit card company, a student loan provider, etc., we pay interest.
"Those who understand interest earn it, those who don't, pay it." ~ Albert Einstein
We can all fit into one of three categories when it comes to interest: Debtors, Savers, and the Wealthy. The chart below compares hypothetical results of these three approaches over time with a recurring $10,000 car purchase. Debtors immediately borrow money and pay it back with interest over time—most of America fits into this category. Savers, on the other hand, never incur the interest charges like Debtors do because Savers live within their means and save up to pay cash for purchases. Notice however, the Savers must practice delayed gratification and still end up in roughly the same position as the debtor. The Wealthy know something about money Debtors and Savers do not. They know the Debtors lose money to interest payments and the Savers lose the interest their money could have earned. You really do finance everything that you buy!
In this hypothetical example, the Debtor paid the bank 4% interest. The Saver earned 1.5% but interrupted the compounding effect with every purchase. The Wealthy individual found a financial vehicle that yielded uninterrupted compound interest of 4% (more on this in future articles). If he continues this process he could actually earn more in interest each year than the cost of the car! That is the kind of financial freedom we want to teach you to acquire.
Becoming Debt-Free is great. Becoming Financially Free is greater.
Uninterrupted compound growth is extremely powerful, but we'll stifle its true potential if we do not treat our money as well as the money we borrow. Whenever we borrow money from others we pay them interest—isn't the money we earn just as good as the money we borrow? We can outperform the Debtor and the Saver if we recognize the real value of our money and pay ourselves interest. In the next article we'll discuss the third and final rule to making money work for you!
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The information presented here is solely for informational and educational purposes. Dan Watkins is not a registered financial adviser. He can be reached at: danwatkins@livingwealth.com.