Sunday, June 26, 2011

Financing and Savings: Focus on Volume of Interest Not Rate of Interest/Return

Financing and Savings: Focus on Volume of Interest Not Rate of Interest/Return

I hear it all the time on the television, in the coffee shop, and even when out at dinner. What is it I hear? “I just got a great interest rate on my new car, boat, credit card, home etc.” What most people either do not know or do not understand is that it is the volume of interest that is a wealth destroyer and not necessarily the interest rate.

So for instance say you had a $20,000 car you just purchased and got a great rate of 4.9% over 5 years. Your first payment would be $376.51 of that $81.67 would be interest (21.69%) and $294.84 would be principal (78.30%). Over the term of 5-years (assuming it was not traded in early) $2,590 (or 11.30%) would have been paid in interest.

It is said that the average person spends an average 35% of every after-tax dollar on financing for purchases that were already made and saves less than 5%. So if we are to get ahead in life what rate of return would we need to equal the amount of every dollar we willing sent to a bank or financial institution (700%!!)? What if someone, like myself, could help you change this equation?

When it comes to savings the same thing applies. If we can change the 35% and 5% equation to say 20% and 20% things get a lot better. Would you rather have an account that was at the mercy of the market with a balance of $25,000 earning $2,000 in interest a year (8%) or would you rather a have a safe place with a larger balance of $100,000 (because you saved 4 times as much) earning $4,500 a year (4.5%).

When you focus on volume of interest many things come into perspective.

If you would like help to see how you can focus on volume, not interest rate, and see how you might be able to improve your own equation please feel free to email me at: