Billing your Way to Wealth—Part 2

Brief Recap:

I was introduced to this concept of “billing yourself to wealth” at a seminar in England back in 1991 given by a highly successful German business consultant. His way of achieving this concept was through getting a mortgage. A mortgage in this context has these powerful features:

– you have a monthly bill.
– regardless of your financial condition, you have to pay it.
– you cannot use the monthly payments.
– these payments continue over a long period of time.
– you must outlay a set amount of money, no matter what, for tens of years.
– eventually “out of nowhere” you would have hundreds of thousands of dollars.

For these reasons, this consultant advocated to getting into a mortgage even if doing so seemed economically unfeasible. This is why: some people in the audience argued that by the time you considered the amount of interest spent on a mortgage (from 2 to 3 times the cash price of the property) plus the carrying expenses, it was a bad financial proposition to use a mortgage as a savings vehicle since you would get less than what you put in.

The very interesting reply from this gentleman was that it didn’t matter since you WILL get something as opposed to not doing it and getting nothing. In his vast experience, he saw that people never saved and whatever they did accumulate was used. In the final analysis, according to him, even the best conceived plans were not carried out and the person went through the same volume of money without anything to show for. Therefore according to his rationale, it was better to spend $3 to get $1 since at least, if you do it in a way that you have no other option or not much choice, you would be forced to do it and you would end up with something.

He then cited numerous examples of his clients that did take a mortgage and how after 10 or so years they were in a much better financial position by following this advice.

What we are proposing:

Though in agreement with what is expounded above, one of the biggest disadvantages of a mortgage is that the funds paid into it get you a 0% (cero) percent rate of return. The eventual appreciation you might get from owning property IS NOT related to the amount you pay into your mortgage. A property that is 99% mortgaged or another that is only 10% mortgaged, will appreciate at THE SAME RATE if in the same neighborhood. The extra money paid into the mortgage will NOT influence the amount of appreciation.

Equity is the amount of appreciation + what you have paid into the mortgage. The home that is only 10% mortgaged will have more equity; however that equity will consist mainly of the payments done by the homeowner. These payments over time do not generate any interest.

A Better Way to do the Same:

What if you could achieve the same concept as outlined above, but:

– instead of spending $3 to get $1, you would actually spend $1 to get $1.5?
– you could use the money in a real emergency.
– instead of 30 years, your could accumulate your wealth in 10 or less?
– this plan allowed you to put more money?
– was tax free?
– had some creditor – bankruptcy protection?
– your funds would not be subject to market fluctuations?
– was safer than your current 401K or IRA?
– as of May of 2007, the financial institutions that provided this plan were stronger, according to Moody’s ratings, than (just to name a few): Discover Bank, Downey Savings & Loans, American Express Bank, Citibank, Washington Mutual Bank, Wachovia Bank, JP Morgan Chase Bank, Goldman Sachs Bank, ETrade Bank and Credit Suisse?

Remember, we are not advocating here to the best investing strategy, all we are saying is that it is a very good idea to have a “piggy bank”. A mortgage can be used as a piggy bank but it has several disadvantages, the main one being that you get a negative rate of return, you get less, about 1/3 or less than what you put in.

This is a system to create a piggy bank in steroids! It is not intended to replace or it does not claim to outperform other investment strategies. Rather, this is a way to disguise and put away a portion of your monthly budget that would otherwise evaporate anyway.

I want to make sure we are placing this into its proper perspective. You can argue that it is possible to get better returns and this would be correct! Totally correct! However the intention here is to shave a slice of your monthly budget and save it in such a fashion as to not impact your current existing finances and however do make a difference for the future.

We are replacing negative savings for positive savings.

Remember, most people, whether poor or rich, whether financially ignorant or savvy, do not have a consistent plan. The mortgage formula described above DOES work and it is currently being used by millions of people. The purpose here is to rescue some of those dollars and channel them back into your pocket in a manner that gives you little choice and in the form of a monthly bill so it becomes another bill that has to be paid.

A correctly structured Life Insurance Plan does achieve all of the above plus provides protection. You get a monthly bill that you have to pay, when correctly structured (a life insurance plan has many moving parts), most of your premium payments accumulate in the form of what it is called “cash value” that earns a conservative 5% to 7% rate of return, you cannot easily have access to this money for the first 10 years, you incur expensive penalties if you cancel (surrender charge), your principal is guaranteed (unlike on a home), if you follow the rules it is tax-free and also it enjoys some level of credit protection. This is how O.J. Simpson continues to live a good life despite a multimillion dollars judgment against him.

In essence, when compared to a mortgage:

– you have a monthly bill.
– you have to pay it, canceling it would result in a hefty loss.
– at the beginning you cannot use the money being accumulated, save going through a lot of hurdles.
– you have to continue with the plan over a long period of time.
– in about a third of the time compared to a mortgage, you will have a substantial savings.

This is not being touted as the only way to save or that it is the best way to save, this is being promoted as a very effective and efficient way to save since you get more than what you put in, the financial strength of the companies behind is greater than most banks and you do get back part of your monthly budget that otherwise would be consumed in the ordinary course of daily living. This strategy is a supplement to additional investment strategies that you might have or do in the future. 

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