We’ve all heard that “compounding interest is the 8th wonder of the world.” If that’s true, then simple interest may be the 9th wonder! How can you use simple interest to make MILLIONS more than traditional ways? In this episode, Chris Miles shares how paying simple interest to banks can help you make millions more. He’ll share how one client can improve his cash flow by over $10,000 per month NOW and have $1,360,000 more after ten years with NO money out of pocket. Tune in to find out how he did it!
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The Miracle Of SIMPLE Interest
Welcome to our show that’s for you, those of you that work so hard for your money and you’re ready for your money to start working harder for you now. You want that freedom of cashflow now, not 30 or 40 years from now but you want it now so you can live that life that you love with those that you love. Most importantly, it’s not just about getting rich and becoming financially independent. It’s more about creating a rich life because as you are blessed financially, you now are liberated and have a greater capacity to bless the lives of others.
That is the ripple effect we’re here to create. Create this freedom and prosperity in your life now. We want 1,000 of you or more financially independent by the year 2030. The question is, will it be you? That choice is yours. As a reminder, if you haven’t done so already, go to our website MoneyRipples.com. Check out, there are lots of blogs. You can take the passive income calculator on there if you want to determine whether you could create enough passive income to become financially independent next year, let alone the next 10-plus years so check that out now.
Folks, I’m going to talk about the miracle of simple interest. Not compounding interest. We’re not trying to misquote Albert Einstein, where people say he said that compounding interest is the eighth wonder of the world. He never said that. Talking about compounding numbers has nothing to do with finances and interest. You’ll only see that on financial advisors’ websites and network marketing sites. It’s what I’ve found out when I look for the real quote.
I’m going to talk about simple interests. This is such a powerful concept that if you get it, I’m going to share at the end here, how one of my clients is able to create in the next 10 years, more than $1.3 million by understanding this one simple concept of simple interest. I want to get into this now. I want to get to the numbers.
We know about compounding interest. As time goes on, interest accrues. That’s not because the interest rate changes. I want you to understand that. It’s only because it grows more. Say that you have $100,000 sitting in a savings account now. You earn 1% interest. That means the next year, you’ll have $101,000 because you made $1,000 on $100,000. The next year, you’re earning 1% on $101,000 and so now you have $102,000 and change.
The same thing, if you earn 10%. You went from $100,000 to $110,000 but now you’re earning 10% on $110,000. You go from $110,000 to $121,000 because you made $11,000 off of that. It compounds. It gets more and more as time goes on. Simple interest is different. Simple interest is essentially the interest rate that you’re charged, especially when you have a loan.
Many times, people will say, “How do I beat the interest rate?” If I have a 6% loan, I need to make at least 6% to make money. If I don’t make at least 6%, it’s not worth it. At face value, that’s true but the question I have is, “Is it really?” Let’s take a look here. I’m going to use a simple example here. Say that you get a $30,000 auto loan and let’s say that’s a 5-year term that you have it for so pretty typical 60-month loan and you’re being charged 6% interest.
You calculate that out. The payment is about $580 a month. Here’s the part that everybody hates. It’s the interest that you’re paying. There’s one thing about loans and there are a lot of people that are very debt adverse. Honestly, you should be to some level. You shouldn’t fear debt but you should respect it because it can either help you or hurt you, depending on who you are and what kind of steward you are over the money you’re given.
If you’re a spender, having debt is always a bad thing. If you’re somebody that hoards money and you can’t get over the emotional aspect of how debt could work in your favor because you don’t know how to be a wise steward of your money, you just hoard money and almost bury it under a mattress, that is evil because debt doesn’t work. It only works for the steward that can make more than what it costs you.
Always In Debt
Always remember this, you’re always in debt. You’re always paying interest. You’re paying interest to a bank or if you pay cash for something, you have a lost opportunity cost of interest you could have made. Understand this, you get a loan out. You pay interest to a bank. That’s one cost you have but if you pay cash for something, you’ve lost the ability to earn interest on that money. That’s called a lost opportunity cost.If you pay cash for something, you've now lost the ability to earn interest on that money. That's called a lost opportunity cost. Click To Tweet
If I have $30,000, I can either invest it and make money or I could buy a car and cash outright. What does that cost me? If I get a car loan, it costs me 6% in this case. That’s what’s going to cost me. The interest cost me over those 5 years is about $4,800. The real question is, “Can I do better than that? As a steward, am I wise enough with my money that could do better than $4,800 in 5 years? What could I be doing with my $30,000 otherwise?”
If you don’t know what to do with your money, being debt-free is probably great. I’m not saying you shouldn’t be debt-free. A lot of our clients are debt-free other than their mortgages. We sometimes have them use debt and sometimes they don’t. You don’t have to. It’s always based on who you are and how wise you are with the money you have. The question is, “What if I had $30,000? What if I put in a nice little promotional CV paying me 5%?”
Let’s say that 5% is over 5 years. I know they’re better for the 2 or 3-year CVs now than the 5-year but go with me on this. Let’s say it’s 5 years, 5%. My money’s out there. My car is going to be paid off but it’s going to cost me $4,800 in interest. I’m going to do that instead of using my $30,000 cash to pay it off. I’m going to have that $30,000 cash sitting around in that CV.
What would that earn if it’s at 5%? If I’m paying 6% on this loan and I’m paying $4,800, what do you think 5% on a CV with $30,000 sitting in it after 5 years is going to create? Here’s the answer, right here. If you’re in 5%, which is 1% less than it costs you on your loan, look what happens. You make $8,200. Almost $8,300 and you might be thinking, “Chris, $8,300? How is that more than the $4,800? That’s $3,500 more in interest.” That’s almost double the interest yet you earned 1% less on that CV. “How is that even possible? There’s got to be some funky numbers here. Chris, what are you doing? What are you doing messing with these numbers?”
It is simple math. Many people have the misbelief that with loan interest, the banks are messing with you. They’re charging all this interest upfront. No, they’re not. Let me show you the amortization table. Every month, more goes to the principal. Not because the banks are trying to screw you over. It’s simple math because as you have $30,000, you pay that $580 payment, $430 goes to the principal while $150 goes to interest.
That means your balance went down to $29,570. If you’re being charged 6%, the interest next month is only about $148 but you paid it down to almost $29,000. The next month, it’s about $145 at 6%. As you pay that balance down, the interest you’re being charged goes down. That’s why if you try to do the math, you think, “6% times 5 years is 30%. What’s 30% of 30,000? It’s $9,000.” No, it’s not $9,000. It did not cost you $9,000 in interest. It costs you about half that because you’re paying it down.
That’s why at even earning 5%, you didn’t even match the same interest rate. You still earn $3,500 more. If you did earn the same interest rate, look at this. Voila, you made $10,000 while it costs you $4,800. You made more than double earning the same interest rate after five years. Watch this, 3%, there it is $4,778. It’s a few bucks less than the interest you would earn. It was about 3.01%. If you earn 3.01%, you will match a 6% loan.
If you have a five-year car loan, know this. Whatever interest they’re going to charge you, you can earn at least half that interest rate. You can make as much interest as what they charged you over the life of that loan paying the minimum payment. Not even accelerating it, not paying off early, just paying the minimum payment. That’s pretty powerful. Think about it.
This is why I don’t mind getting car loans. I’ve paid mine off but I paid them off after a period of time. I leveraged that bank’s money for cheap. I love cheap bank money. I love getting mortgages. I love car loans. I love cheap things. Student loans are the same thing. Many people get so worked up about student loans but if it’s a low interest rate, you would have to beat it. If you don’t know what to do with your money, then it doesn’t matter. You might as well be debt-free.
If you’re a spender, you can’t control your spending habits, you’re not going to use your money wisely anyways, then pay off your debt. Be debt-free. For those of us that try to be wiser stewards of our money, those of us that aren’t willing to blow through our money and were willing to look at things more rationally versus trying to get our emotions all worked up because Dave Ramsey told us that’s stupid, all that stuff, that’s not helpful.
Do you want to see something that’s awesome? What if we apply this to a mortgage? Let’s say that the loan on the mortgage is $300,000. It’s not going to be a five-year loan term. That would be horrible. I’m going to put this at a current rate I’m seeing now, 6.375 for a 30-year mortgage. The interest you earn on that is about $373,000. When I was a mortgage broker, I use this against people.
Paying The Mortgage Early
As a mortgage broker, I thought I was doing clients a favor by telling them how to stick it back to the bank by paying off this mortgage early. The truth is I was doing what the bank wanted me to do because the banks already get these numbers. They already understand this. They manipulate this all the time. If they had a debt so much, they wouldn’t be taking your money in deposits and the savings account, would they?
They wouldn’t be taking your money in CVs. No, they wouldn’t because they wouldn’t like the pay interest. They love paying interest because they know they can make more than what you’re paying them. In truth, even when they’re paying you compounding interest, they still know they can make more in simple interest because they know how to manipulate the numbers right. Look at this, $373,000 that’s interest. Even though it’s a $300,000 loan, you paid $673,000 in payments. This is what people fear.
They see this and say, “I’m paying more than double my mortgage balance. I need to pay this off fast. I got to get rid of this thing.” They fear the $373,000. The thing you should be asking yourself is, “My best-case scenario is I have $300,000. I can liquidate all my assets. If I can do that, I pay off my mortgage.” There are probably some of you that probably have enough assets. You could pay off your mortgage now. For whatever reason, Dave Ramsey didn’t tell you to do that, did he?
Sometimes he does and sometimes he doesn’t. He’s not saying cash all your investments and pay off your mortgage. If it’s so bad, maybe you should but let’s see the difference. Let’s see what happens here. Let’s use that same 5% rate. This is a higher interest than the last example I used. Let’s say you only earned 5% so $300,000. Your total interest earned is almost $1 million. Understand that it costs you $373,000 but you made over $600,000 more by not paying it off.
By taking that money, you could have used it to pay it off and invest it elsewhere. That was 5%. What happens if you make 8%? It’s at $2.7 million at 8%. Eight percent is a very conservative number. Even financial advisors think it’s a conservative number. $2.7 million, do you think you’re going to care about $373,000 if you know you can make plus $2.35 million more? Do you think you care about having a mortgage? No, but we’ve been taught and trained by banks, especially. Banks want you to pay off faster because that puts them at less risk.
The more equity you have and if something ever happens, you can’t make payments, they can foreclose, have equity and sell it off. If you have a leveraged mortgage, you’ve got it up to say 80%, which is not that bad but banks aren’t in the business. They don’t want to have to deal with real estate. They want to be in the business of making cashflow. They want passive income too. They want the same thing you want but they’re going to try to play that game.
They love it when you try to pay off your house early because it gives them less risk. By the time you pay it off anyways, they make more money. Here’s a great thing. For every dollar you pay them, they have the ability to loan out $10 more so they’re going to tell you to pay more on principal. If you pay an extra thousand dollars on principal this month, they now have $10,000. They can lend right back out, making more money off the money you paid them.
You didn’t make $10,000-plus off that. There’s a piddly little amount of interest that you saved and it is piddly. If you pay extra payments on your mortgage, it saves you so little in the grand scheme of things. It saves you so little interest compared to what you can make on this money. That’s the key. Many of our investors pay at least 10%. Look at this, $4.9 million, almost $5 million. Do you think I care about $400,000 of that?
No, I don’t mind making over $4.5 million more than it cost me. Those numbers can even be more insane. For example, if you buy properties with leverage, say you use that $300,000 to buy properties that you have mortgages on, it’s not too uncommon to get 20%. You would think the reason is $70 million plus. You’d say, “That’s impossible.” Do you know people who have done real estate investing that have millions of dollars? They have. After 30 years especially, there are.
Even if I put it down to 15%, it’s still $19.5 million. It’s not too far-fetched, especially when we factor in inflation and everything else. I’m not saying this is what your life is going to look like exactly. I want to apply this to a real-life situation. I’m going to talk about this situation here with Mr. D. I don’t mean Mr. Drummond from Diff’rent Strokes. Do you folks remember that show with Gary Coleman, in which you talk about Willis? Mr. D is not Mr. Drummond but we’ll call him Mr. D for that matter.
This is a real-life client right here and this is what he did. This is how he was able to get an extra $1.3 million in 10 years. He’s got a first mortgage, got a great interest rate of $285,000 balance but his payments are $4,180 a month, which means he’s got about 6/4. It’s 6 years, 3 months to be exact based on his interest rate that he has left this mortgage.
He also has a second mortgage that’s at 9.08%. He fixed the rate. It was a HELOC before he fixed the rate. The crazy thing is he also has a variable rate HELOC for $15,000. It’s not a lot but he’s got three mortgages here. The balance of that 9% is higher than the first mortgage. The payment is pretty big too. He’s got 24 years left. If he paid off his mortgage, the rate he’s been going, 6 years and 3 months, takes that $4,180 payment, applies it to the $2,493 and tries to pay that down, eventually, he would pay off all of these 3 of these mortgages by rolling the payment into each other, which is 67 or 64 a month. He’ll pay it off in ten and a half years, free and clear home.
The Current Plan
This was his current plan. This is his wife’s plan, especially since his wife is saying, “I don’t want debt. Pay it off.” He’s paying down some of these other loans that he’s got. He’s got some credit cards. There’s nothing big there. He’s got a few auto loans that he’s been leveraging at great interest rates and very good interest rates. We were looking at his situation and the cashflow index, as I’ve mentioned in another episode before.
I said, “We could do something here.” I told him he could cash out and refinance. He could cash out and get the amount of money to pay off those other loans. He’ll still be able to pay off at the same time by fixing the rate. I said, “What if you cash out a little bit more? Not just to pay off some of these loans,” which will be great. It will free up a ton of money per month, roughly more than $8,000 a month. What if we also get money out to invest?
I said, “Let’s refinance your 1st, 2nd and 3rd mortgage to a fixed 30-year.” His thing was, “Chris, I’ve got such a good mortgage rate.” I said, “On one of them you do but you got other rates that don’t.” Folks, in the episode I talked about before, the other woman had only that one mortgage rate. It was very good and we’re still able to refinance, lower her payments, get cash out and be able to invest with it to still make her at least $400 or $500 a month net.
His case is even better because he’s got those different loans, we could still get his payment way dramatically down if he wanted to keep a low payment. That’s the one beautiful thing but here we can get 400,000 out to invest and his payment is still $379 less than he’s currently paying. He pays $6,425 a month on this mortgage payment now, even though he’s got $400,000 cash plus he paid off all these other loans freeing up almost $6,500 a month in cashflow right there.
Between all these things and the $400,000 invested, even if he made 10%, that’s $3,333 a month. I went down to make it simple. He’s now got a net gain per month, $10,200 a month. Somebody might say, “Chris, he’s got a lot of money he’s got flowing through.” Yes, he does. The guy makes great income as many of our clients do. He makes on the higher end, I would say. He had some pretty high loan payments. Why? It’s because he was aggressively paying them off. We said, “Let’s get it all done. Let’s consolidate it all.”
Not all of his debt. We kept one car loan out as well as another credit card we did not pay off and some other things too like a student loan. We left those things alone. We said, “Those things are great. Don’t even pay off early, just make minimum payments. Focus here. Get the cashflow.” The great thing is saving over $10,000 a month, if anything goes wrong in the situation, at least he’s protected because he’s not forced to make these payments.
Now he was paying extra payments anyways but this lowers his payment, putting him at less risk. A bank would look at you and say, “Your debt-to-income ratio is better. We like you better. We want to give you a loan now.” They want to make sure you can pay your bills, especially if something goes wrong. Keep good cash reserves and you have that. Remember, if you have that money invested, only make it 10%. Over $3,300 a month right there, it’s $10,200 a month.
Paying Off Faster With No Extra Money
He has two choices with this. He has options and this is why I try to emphasize his wife who wants to pay off the house sooner. They still can. They could pay it off in six and a half years. Not ten and a half. They’ll save themselves four years, paying off faster with no extra money out of pocket. None of this is requiring more money out of pocket for them. This is all purely based on the resource they have within the equity of their home.
We’re not even leveraging their home of full use. There’s still plenty of more room. I use this as an example saying, “This is great. You can meet the California FHA guidelines. Do this much.” He could pay it off in six and a half years or because of this miracle of simple interest on this mortgage, he can use the compounding interest to his benefit where he would have after ten and a half years, which is the period that he was expected to pay off his mortgage in the first place, doing these same payments.
He’ll have $2.2 million in cash and still has a mortgage balance of $859,000 if they chose to. His wife could say, “Let’s pay it off, be free and clear.” You can do that and still have $1.636 million net. They’re not just debt-free. Understand that everybody’s trying to focus on being debt-free, even them in ten and a half years, based on the current mortgages, even with the low rate, it’s still ten and a half years. What do they get? No more payments.
They don’t pay that $6,700 a month but now they don’t have any income coming in either. They save money but they don’t have any actual income. They still have to keep working to pay for the other bills because they still have to live. With that $1.36 million, not only do you have a paid-off house. You have $1.36 million that even at 10% will pay you $136,000 a year or over $11,000 a month in 10.5 years.
The same thing is doing the same strategy. With the same money coming out but you use that simple interest to your advantage while using compounding interest. Could compounding interest be the eighth wonder in the world? Sure, but many people forget that the real power is the simple interest, the fact that it doesn’t cost you as much as you think it does. This is what most Americans are missing. I didn’t even learn this for myself until I’ve been in the financial space for about six years.
It was 2008 or 2009 when I got this. I was like, “This is amazing.” I learned this first because of infinite banking. Infinite banking talks about this because some people say, “My loan interest is a half percent higher than the dividend I’m earning. I’m losing.” No, you’re not because as I showed you with that car loan example. As long as you’re earning at least half the interest, you’ll come out at least making the same amount of interest if not winning.
This is why infinite banking works, even if the loan interest rate on your infinite banking policy is higher than the dividend they’re paying you. It still works as long you’re paying at least interest only on those loans. If you can’t let the money compound against you, you’re right. You have compounding interest versus compounding interest. When you leverage simple interest to your benefit and you’re paying at least interest only or principal and interest, this is where you get the advantage.You get the advantage when you leverage simple interest to your benefit and when paying at least interest only or principal and interest. Click To Tweet
This is why when I showed the example a few months ago, talking about how you can invest your money, making about $110,000 a year of passive income in 10 years or using infinite banking, it can be $120,000 a year after 10 years. That’s why. Understand this concept. 1) You’ll understand why debt doesn’t scare me as much, especially if it’s a lower interest. 2) Why infinite banking works the way it does and why you end up making money in two places at the same time.
You understand this one concept, you now understand more than probably about any financial advisor you talk to. I can assure you. Most financial advisors don’t truly understand how this all works but the beautiful thing is that this could work to your advantage. That’s the secret that investors figure out. We are more than willing to leverage banks’ money, especially when it’s cheap like banks are willing to leverage our money for cheap by putting in savings or CVs or money markets.
They do the same thing. Do you want to become the bank? Do you want to play by the rules of the bank? Turn the rules right around for your benefit. Banks invest in life insurance. We’ve already heard that. We had Eddie Wilson that said the same thing. That’s what he learned as a kid from bank presidents. It’s also why we don’t mind borrowing money for cheap from the bank. This is why even a business loan can make sense from a bank. This is why borrowing from a car loan can make sense.
You have to be a wise steward of this. If you don’t use the money well and you don’t know what to do with the money, it doesn’t work. This is why with a lot of our clients, this might be the first thing we address and then their natural next question is, “Where do I get those returns? If I’m going to pay 6% plus on my mortgage, where can I earn at least let’s say 4% to make sure I make more over that period?”
First off, 4% is not hard to get. We can do a crappy, guaranteed annuity and still get a pretty decent return with all kinds of annuities for that matter. Maybe index, not fixed but index annuity specifically. We can make more money there. There are even annuities you can annuitize and get a 6% or 7% guarantee. That’s not what we’re talking about, though. You can do so much better by not tapping into it locking up your money, still having that golden goose lay much bigger and brighter golden eggs for you.
It’s not impossible to get double-digit returns off that money because if you get an extra million dollars off this, that’s now an extra $100,000 a year of income without touching your principal. That’s the difference between the accumulation mindset, which is all about saving money and paying off debt versus the acceleration or the cashflow passive income mindset, which is about leverage and stewardship, using your money to create more money and get your money working harder for you so you’re not working so hard for money.
That is the secret sauce that changed my whole perspective on investing. Even if it doesn’t change yours, I know maybe you’ve got some doubts. You’re probably wondering, “Is this true? Is this legit? How do I fund those returns?” That’s what we do. We help you find those returning investments. That doesn’t mean that that’s guaranteed and we’re investment advisors. We’re not.
We’re great strategists like we did with this guy saying, “If you refinance and do this strategy in your personal finances here, we refinance and get some cash out too, you got the ability to not only save income but also save on your payments,” which is always nice. He fixes his rate, which is awesome too. He doesn’t have to worry about his HELOC. He gets cash out that allows him to invest and gives him a lot more benefits.
Not to mention, we paid off a bunch of loans. It put him in a healthier cashflow position and it gets him to the point where he has a choice. That’s what a good financial plan does. Financial plans don’t keep you in a rut where you can only do one thing with it. If that one strategy doesn’t work out, you’re lost. Remember, he has the option. He could pay off his house four years earlier than the current path or you can take that same money, invest it, get to work for him and then that same 10.5-year time period, have over $1.3 million more than he would have to do the traditional financial plan that the Dave Ramsey’s and the Suze Orman’s and everybody else recommends that you do.
We’re not about that. We’re about to get you freedom now. What potential is in your situation? Great question. I don’t know. I’m not looking at your situation now but I can imagine your situation where you might have equity in your home. Maybe you have equity in your home or maybe not. Maybe you’ve got cash sitting on the side that you’re wondering what to do with it or how to get it to work better for you. Maybe it’s not sitting on the side. Maybe you’ve been investing but it’s not doing a great job.
Could it be doing better? What’s your lost opportunity cost by not doing what’s better for you now? If you have questions, always reach out to us at MoneyRipples.com. I hope the power of simple interest rings through your ears, gets through your brain, knocks around a little bit and blows your mind because it blew mine and I hope it blows yours. Make it a wonderful prosperous week. We’ll see you later.