The Myths that Keep You Broke – 5 & 6

This is the third in a series of articles revealing the Myths that Keep Your Broke. In these articles, I will uncover the many myths that too many people believe. These myths can prevent you from creating wealth and financial freedom. Let’s start destroying them.

Myth #5: It’s Rude to Talk About Money

You may think, and your parents may have said to you, “It’s rude to talk about money.” If that is the case, it is likely your parents were not wealthy. Or even if they had wealth, they lacked a wealthy mindset.

People with a wealthy mindset do not feel it is rude to talk about money. They teach their children how money works, often by example. They talk about money with their peers to either brag or to support one another.

They talk about how much they pay staff; how much they paid for the country club membership; what investments they’ve made; what they earn on various investments; and the deal they got on the car they purchased or the jet they leased.

Sure, some of it might be bragging, but the point is they do not see it as rude. It might look like this: “You might want to consider buying into XYZ Corporation because at the rate they are growing they could have a stock split in the next 12 months. I just purchased 1000 shares.”

Another example is when I am talking with other apartment building owners. I might ask what they get for a 1 bedroom apartment in the city and they might say, “$1695 per month.” My reply might be, “That’s $100 more per month than I am getting. I should look into that.”

Now if you are a tenant, and asked that question, you would not get an answer. But from one apartment building owner to another, we will talk about money. We will talk about how much we pay our plumber, our roofer, our handyman, our pest control, our utilities and more.

Again, wealthy people do not find it rude to talk about money. We are exchanging information to help each other.

Do you have people you can talk to about money even if they are not wealthy? If you don’t, where can you find people like that?

Myth #6: I Don’t Need to Know Money Terms

Many years ago when I was first learning the terms as a part of becoming a Certified Financial Planner® I heard someone ask the instructor, “How important is it whether or not I learn all these definitions?” He was referring to the terms we were studying in that session about present value and future value.

There are many terms the wealthy use when they talk about money, and the first thing to understand is that the wealthy do not think it is rude to talk about money (see Myth 5 above). It is crucial that to create wealth you need to understand some basic money terms.

As an example, not all interest is the same. When you understand the difference between simple interest and compound interest, you will vote to earn compound interest. Instead of just receiving interest on your principal, you want interest paid on your interest, which is compound interest.

When you understand the difference between the value of a dollar today (present value) versus the value of a dollar in the future (future value) you will know why a lottery winner who elects to take a $1 million prize that would have been paid out over 20 years only gets $456,387 as a lump sum today (or less if an interest rate higher than 4% is used). This does not take into consideration any income taxes that would be due.

1. Interest is what a borrower pays a lender for the use of money. If you deposit money in a bank, you are the lender and the bank is the borrower. In this environment, the bank will pay you about 1% to borrow money from you. (This is a typical savings account.) If you borrow money from the bank, they are the lender and may charge you 6-10% interest. The difference between the 1% they pay on savings and the 6% they charge on a loan is called the “spread,” and this is how they make a profit.

2. Earnings are often confused with interest by people who do not know money terms. If you own a stock or a mutual fund, it may pay a dividend and grow in value over time. If you receive a 1% dividend and it grows in value by 8% over a one year period, the total earnings would be 9%. This is not interest, but total earnings. 1% is income and 8% is appreciation. If you see that a mutual fund or stock returned 22% over a one year period that could all be appreciation, with no income and has nothing to do with interest.

3. The cost of money refers to borrowing money to invest, whether in other stocks, a business, real estate or whatever. The point is that you should earn more money than the amount of interest you pay. This is the cost of money, also called the cost of funds. If I borrow money at 4% and I can invest it or loan it out at 10%, then I am the one earning the spread, and my cost of funds is 4%. You do not have to put money in the bank to earn interest. This is available to you through peer-to-peer lending, trust deeds, tax liens and other financial instruments like bonds.

There are so many more financial terms, I could write a whole booklet; debt coverage ratio, capitalization rates, amortization, depreciation, discounting, puts, calls, options, margin accounts, on and on.

When you come across a money term that you do not understand you can learn more by typing it into Google. You can even do that with some of the terms I mentioned in the paragraph above.

Regardless, if you intend to become wealthy, you do need to understand money terms.

To Your Prosperity,

Rennie