LAW # 1: THE LAW OF ACCESS
Prof. Rodney Ballance
Who is your money really working for?
The Law of Access simply teaches us that the most valuable asset you will ever know is that asset which you need, but cannot get your hands on. Imagine being stranded in the desert having to endure the torturous sun bearing down on you as you try to find your way to safety. As you begin to dehydrate you would give everything you have for a cup of water. That water then is the most valuable resource in the world to you.
That’s how it was during the run on the banks during the “Great Depression”. People would settle for pennies on the dollar just to have enough to be able to buy groceries for their family. Loans were called, and homes were foreclosed on because people couldn’t get to their money.
This is how it will be when hyper-inflation hits us here in America, and people are struggling to once again simply be able to provide for their families. Through what’s known as “Quantitative Easing” the United States Federal Reserve has artificially devalued our currency to the point that it has less buying power every day. As a side effect the stock market has seen a dramatic increase in value since March of 2009, but is a very dangerous situation because it’s sucking people into the promise of easy money again just like the bull rally of 2007, just before the crisis.
When the value of your currency is less, it seems that prices continue to increase. The typical symptoms of this phenomenon are reduced quantity in containers you are used to buying, but the price is the same. You also see a combination of less quantity and higher prices. Some example of this are a 5lb bagof sugar is now only 4lbs, but the cost is the same. Or a pound of bacon is now only 12 ounces, and the price is $1.50 more than you’re used to paying.
It seems like the only thing constant about financial issues these days is change. The value of our US Dollar is shrinking to the point that it will only buy a fraction of what it used to. Inflation is growing everywhere from the grocery store to the gas pump, yet our homes are only worth a fraction of whatthey were a few short years ago.
Employers are moving our jobs to foreign nations daily to escape the high taxes and uncertain government regulations on everything from health care to labor laws and safety regulations. No matter the reason for them leaving, they leave behind millions of people searching for new jobs or just trying to figure out what to do next.
Times are changing rapidly and not always for the better. So how do we prepare for such times? How do we adapt to the future of what America will be? How do we prepare for job loss, or reduction in wages, or higher costs due to inflation?
This is why the Law of Access is so important. Money is only good if you can get to it. For example you could have $300,000 of equity in your home when you lost your job. You might have been sending all your extra money to the bank to pay down your mortgage, and extra to pay off your credit cards and still more to pay off your car. All the while you thought “as soon as I get these debts paid down I’ll start building my retirement account”.
Then change came and you lost your job. Most people would think they can just go to the bank and get a home equity loan or simply refinance their mortgage to access some of that money, right? Not so fast. What’s the one thing you need when you’re applying for a loan? That’s right a job. Without a job you don’t have access to any of that equity.
What’s worse is houses with large amounts of equity are typically the ones banks will foreclose on faster than those with little or no equity in them. That’s because the bank has gotten most of their original money back from you, and they know they can sell your house for less than the true value and still make a huge profit on the property.
This is one of the biggest mistakes most people make in terms of having access to their money. They have been brainwashed by the banks and entertainers selling their one size fits all debt free philosophy. Many go so far to think, if they have a dollar the need to send it to someone else to pay off debt with no regard for whether or not that debt may actually work to their benefit.That’s right I said that some debt can be good for you. Since we started talking about mortgages, let’s continue down that path for now. Think about it. What are the only two tax deductions we’re still allowed to have on our personal income tax? Our dependent children and the amount we paid to our lender for mortgage interest. If you didn’t have these deductions how much more would you have to pay in taxes this year?
Here’s another way to look at it. If you owe $30,000 to credit card companies, $40,000 to banks for car payments, and $100,000 for your mortgage you have a total of $170,000 in debt, right? The problem is that only the interest paid on the mortgage is deductible from your taxable income. You probably paid more in interest on the cars and credit cards than you paid on your mortgage.
Another problem is that the higher interest rates you typically pay on the $70,000 for credit cards and car payments cause your monthly obligations to these companies to be higher than what you pay on the $100,000 you pay for your house. So you’re paying about 50% more per month on 70% of the debt.
Let’s say you have $90,000 equity in your home because you’ve been paying extra in an effort to pay it off as soon as possible. I understand the theory behind getting a 15 year mortgage instead of a 30, but there are much better ways to accomplish the same goal. Here’s one example of how we need to re-think our mortgages as a financial tool instead of simply a debt we need to eliminate as soon as possible.
What if you re-financed while you are still working and obtained a 30 year mortgage which reduces your monthly obligation to the bank. You borrow enough to pay off all your non-preferred debt, thereby making all your interest payments now tax deductible. Your debt is still the exact amount it was, $170,000, but now your monthly obligation has been reduced dramatically, and you have more deductions at the end of the tax year.
Looking at the numbers here’s how it all breaks down. Your mortgage payment was $1097.75 per month ($165,000 at 7% for 30 years). Your new monthly payment, since interest rates have dropped is only $912.60 ($170,000 at 5.5% for 30 years). You’ve saved $182 per month on your mortgage payment.
The bigger saving here though is the money you used to send to the credit cards and car payments. You saved approximately $800 per month on credit card bills and $600 on your car payments. That’s a total of $1,400 per month that you were sending to creditors that offered you no benefit what so ever.
Now you can put that entire $1,400 per month to work for you instead of it working for someone else. You still owe the exact same amount, but you’ve allocated the debt in a way that benefits you instead of the creditors. Remember that creditors are in it for them, not for you. You are simply a number to them so why would they tell you how to take charge of a situation like this.
If you think of a bank or mortgage company like a restaurant, it will start to make more sense to you. A restaurant only has a certain number of tables where they can sit patrons. The faster they turn those tables, or in other words have one customer finish so they can sit another patron the more money they can make with that same table.
Banks are the same way. The sooner they convince you to send them more money to pay down your debt, the faster they can lend it back to you or to someone else. Then they can make even more money off those same funds. It’s that simple, but I bet no one has ever told it to you that way before.
Why wouldn’t they want us to know? Because regular people like you and me aren’t supposed to know these things. That’s how the wealthy get wealthier. The less we know the better they like it. That’s why they pay those entertainers so much money to get you to send all you can back to the lending institutions with such ideas that you’re going to save so much money by with a 15 year loan instead of 30 year mortgage for example.
Let’s take a quick look at the numbers we just used in the previous example where we saved the couple $1,400 per month. If they took that same money they were sending to creditors every month and placed it in a financial tool earning just 2% interest compounded annually for 8 years they would have $145,861 in savings, more than enough to pay their home off (payoff is $145,645.45) if they wanted to. Now that one size fits all advice of a 15 year mortgage doesn’t sound so good does it?The important thing is that the couple had access to every dime of that money if they needed it for an emergency or in case of a job loss, or even if they just needed to replace a car. People who have access to and control over their money will always prevail during challenging economic times.
If you don’t feel that you’re in control over your money, you may be operating on the “Money Management” philosophy. That’s when your money (or lack of it) is controlling you. Throughout this book I’ll teach you how to stop using money management, a re-active approach to personal finance. Instead, you will be empowered to implement what I call Financial Leadership, thereby taking control over your money, and using it in ways that cause it to work for you so you don’t have to work so hard for it.I do want to caution everyone about a serious issue that is facing many people who are sincerely trying to prepare for difficult times. This is the issue of being “gold rich, and cash poor”. I know some people who have horded gold and silver coins and bars to the point that all their money is tied up in precious metals.
This is the same phenomenon I saw in the 1990s when people were buying real estate hand over fist, so much that all their wealth was tied up in property. When a need for cash came about, they either had to sell some property or borrow against it.If I could offer everybody just one word of guidance it would be, DON’T PANIC! I’ve been telling people for quite some time that being prepared for challenging economic times means more than just having a stockpile of precious metals.
In the next session I’ll talk more about this issue, and offer some guidance about retirement accounts such as 401(k) and IRAs.To stay up to date on all the latest financial information from around the world, and get the most reliable guidance available go to www.rodneyballance.org, and join our free E-mail list.
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