Building Real Financial Security and Wealth
Simpler Than You Think—But Not Easy
What is one of the most effective wealth-building tools? It is money in the bank. That may sound like doubletalk…but I assure you it is not. One of the biggest barriers to building wealth for most Americans is not lack of income…but poor savings and debt management skills. We neglect to “pay ourselves first” and build a “rainy day fund” to help buffer us against unexpected expenses that come up; that car repair, home furnace, child’s trip to the dentist, etc.
These incidents occur frequently enough that we should know better and prepare for them. But we don’t. Instead we put them on a credit card and make minimum or small payments each month. This creates a “vicious debt cycle” where we pay a credit card company high interest instead of funding our “rainy day account.” As we say at MSA, “learn to pay yourself first, or pay a credit card company forever.”
We specialize in teaching better savings and debt management skills. We help clients implement minor changes to their budget so they can pay themselves first and break the “vicious debt cycle.” After all, our middle name is Savings.
A common reason given for not establishing an adequate contingency fund is the low rate of interest paid on basic savings accounts. That line of reasoning ignores the profound wisdom “a penny saved is a penny earned!” The total return on a contingency fund is the interest earned on the account PLUS the interest not paid to a credit card company when you have an expense outside of the normal monthly budget.
So how much are we talking here?
In order to do the math we need to make some assumptions. Interest rates on credit cards typically range between 10% and 21%. If you have a credit card balance of $5,000 and you are paying the minimum payment it could take you 25 years or more to pay off that balance. So $5,000 at 21% for 25 years means that a $5,000 loan will have cost you…$21,394.94 in interest. More than 4 times the amount of the money you borrowed. Even at 10% interest rate you will pay $8,630.51 in interest for that $5,000 loan. Still almost 2 times more than what you borrowed. You don’t even want to know how much 1 or 2 maxed out cards are costing you.
So what is the best way to keep all the interest money in your pocket? Build a contingency fund…money in your savings account ready and available to deal with those expenses that occur on an all too regular basis in all of our lives.
Albert Einstein once called compound interest one of the great wonders of the world. Compounding of interest is either working for you or against you every day of your life. If you are routinely using credit cards to finance expenses instead of saving for them ahead of time, then this powerful force is working against you. Learn better budgeting, savings and debt management skills and you can turn that completely around. That is what we teach clients to do.
Do yourself a favor and come and talk to one of our personal bankers today and learn how to break the credit cycle and start building wealth today.
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