Understanding Interest: Are You a Payer or Receiver?

by
Fynanc Team
August 11, 2023
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What are your thoughts when you hear the word "interest" as an investor?

Do you feel uneasy? Have simply not given it much thought, or do you see it as an opportunity to build wealth?

In this first instalment of a three-part series about the importance of interest on your financial journey, George Antone, encourages you to take a moment to introspect. Your mindset about interest might be playing a significant role in whether you are moving forward or backward in your financial journey.

The two sides of the financial system

Consider this statement by Albert Einstein: "Those who understand interest, earn it. Those who don’t, pay it."

This might seem like an amazingly simple concept on the surface, however, there's a hidden truth you might be missing behind this statement.

While hugely over simplified, 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 this world. Dave, on the other hand, is a working-class guy who has no money in his pocket at all.

Dave therefore borrows $500 from Sam at a 10% interest rate over the period of a year.

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, with the knowledge that Dave still owes him $50 to cover the 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. He can ask Sam for another loan. If Sam agrees, he can loan Dave another $500, but will again apply interest. Dave will now owe Sam $100 after he has paid off the principle. It’s easy to recognize “the dept trap” unfolding in this scenario.

2. Dave could file for bankruptcy. However, that means that he goes back to the start, with no money in his pocket. He has made no financial progress and Dave still has all the money in the world.

3. Finally, Dave has the option to work for Sam for free or at very little to pay off his debt.

If you reflect on what is happening between Sam and Dave, it becomes clear that there are two distinct sides to the financial system, the paying side (Dave) and the receiving side (Sam).

Dave represents millions of hard-working middle-class Americans that 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 year of experience guiding people though their financial journeys, George 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 on 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 also 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 to use it as a lever to reach financial freedom.

The question is, which group do you fall into and how is that affecting your financial journey?

If you want to discover how you can become a strategist when it comes to using interest to build wealth, get your copy of George’s book, the Income Amplifier Blueprint.

Subscribe to the Wealth Amplifier YouTube Channel to catch Understanding interest part 2, when George dives deeper into the strategies investors use to benefit from interest.

What are your thoughts when you hear the word "interest" as an investor?

Do you feel uneasy? Have simply not given it much thought, or do you see it as an opportunity to build wealth?

In this first instalment of a three-part series about the importance of interest on your financial journey, George Antone, encourages you to take a moment to introspect. Your mindset about interest might be playing a significant role in whether you are moving forward or backward in your financial journey.

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The two sides of the financial system

Consider this statement by Albert Einstein: "Those who understand interest, earn it. Those who don’t, pay it."

This might seem like an amazingly simple concept on the surface, however, there's a hidden truth you might be missing behind this statement.

While hugely over simplified, 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 this world. Dave, on the other hand, is a working-class guy who has no money in his pocket at all.

Dave therefore borrows $500 from Sam at a 10% interest rate over the period of a year.

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, with the knowledge that Dave still owes him $50 to cover the 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. He can ask Sam for another loan. If Sam agrees, he can loan Dave another $500, but will again apply interest. Dave will now owe Sam $100 after he has paid off the principle. It’s easy to recognize “the dept trap” unfolding in this scenario.

2. Dave could file for bankruptcy. However, that means that he goes back to the start, with no money in his pocket. He has made no financial progress and Dave still has all the money in the world.

3. Finally, Dave has the option to work for Sam for free or at very little to pay off his debt.

If you reflect on what is happening between Sam and Dave, it becomes clear that there are two distinct sides to the financial system, the paying side (Dave) and the receiving side (Sam).

Dave represents millions of hard-working middle-class Americans that 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 though their financial journeys, George 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 on 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 also 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 use it as a lever to reach financial freedom.

The question is, which group do you fall into and how is that affecting your financial journey?

If you want to discover how you can become a strategist when it comes to using interest to build wealth, get your copy of George’s book, the Income Amplifier Blueprint.

Subscribe to the Wealth Amplifier YouTube Channel to catch Understanding interest part 2, when George dives deeper into the strategies investors use to benefit from interest.