39. Interest Rates Vs. Interest Volume when Becoming Your Own Banker

You are listening to the Wealth Without Bay street podcast, a Canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.

Do you want to create passive income and connect with like minded people? If you, if you're an entrepreneur or a high earning business professional and you want to join others just like you who want to build wealth, they want to save on tax and secure their financial future, then join our community. Head over to wealthwithoutbaystreet.com community.

We want to welcome all Wealth Without Bay street listeners, whether you're new, whether you're returning.

Welcome.

Welcome to Wealth Without Bay Street. Today's episode, Richard, is all about rate versus volume and understanding the significance. Are you ready?

Well, I like how you ask that as though you're the nurse, as Nelson said, you're the nurse about to plunge the syringe into my shoulder. Are you ready? You know, because the needle's about to go in because that's, that ties directly into rate versus volume. And Nelson, he would say that it's not the, it's not the rate at which the plunger on the syringe is pushing medicine or antibiotics into my arm. It's the volume of the stuff that's in the vial in comparison to my body weight. That's the actual criteria.

Totally. Too much of it and it'll kill you. Too little and it won't have enough impact. And so let's do this. I'm going to share my screen.

Okay.

Because we're going to dive in, we're going to have some fun here and talk about this. So this was a post from Mike Smella. So Mike Smella, Rich and I, we know Mike from years back.

He's a good guy, he's a great guy.

And so he puts this post out earlier this morning and I had just finished a workout and I checked my phone, I logged on to the Facebooks and I saw Mike Smella's post and I thought instantly, this is going to be an amazing discussion with Rich and I later today. So, Mike, thank you. We'll shoot you a private message with the link to the podcast giving you props for this amazing.

This amazing post. So let's walk through what Mike is sharing here. So first of all, the title of his post is Outstanding Mike Money Education for the Day, Banker's Math.

It fits totally into what we talk.

About and what he's describing. Is he's saying, okay, look, if you. It's an all too familiar way, right, that banks, financial institutions, they lead you to believe one thing, which is low interest rates equals cheap money. Which is true. It is true.

If you can get 2.875% versus accessing capital at 10%, well, grade three arithmetic would tell you that 2.875 is less than 10.

Agreed. Agreed. But what's interesting though is that in this low interest rate environment that we've essentially been, and we've been this slowly declining interest rate scenario for, well, I mean, over a decade, I would say now, at least. Anyway, since the financial crisis of 08 and stuff, we've got all this quote unquote cheap money that's out there. Yet every single year, if you read in the news reports, the banks are making more money.

Record profits. Record profits doesn't have anything to do with the rate. It has to do with the volume. So Mike goes on to say, let's take a look at a home loan refinance, 125,000 bucks, a 30 year amortization with a fixed interest rate of 2.875%. We're going to look at the first five years and you might think to yourself, wow, that's incredibly cheap money. How could they possibly survive? How could the banks possibly carry on and live by lending money out that cheap? Well, in the first five years. So if you look at the true cost of money over that first five year window, it's a much different story. $33,876 is paid in total. That's money that you're permanently transferring away from you. You can't earn interest on it again. It's gone. Permanent transfer of money away.

I just had that south park episode show up in my head again and it's gone and it's gone.

And so 14,122 of that was actually applied toward the principal balance of the mortgage. The remaining 19,754 is the interest in dollars that was paid over years one through five. Now here's some interesting points that are made by Mike. You take the interest, the 19,007,54, you divide that into the 14,122 of principal that was paid. 139.88% interest paid versus principal paid. Now this is where Mike's head literally bursts right off of his shoulders in his Facebook post and he says, your interest paid versus total paid over the first five years is 58.31%. So that means that 58.31 cents of every dollar you paid went to interest. And we know that interest, when a payment is made to a commercial bank, who does the commercial bank put the money to work for?

Stockholders.

The stockholders of the bank. And so if you sell your home or you refinance it again within five years, which we know for Canadians, the average is every three and a half.

Years, if you want to, probably more because of the global pandemic.

And what do you hear? You hear marketing all the time, all the time in mainstream media. Interest rates are the lowest they've ever been. Come and access equity in your home, Refinance, consolidate debt. Well, if you do that, your actual cost of money is 58.31%, but yet the rate.

Was 2.875%. And so this is the, this is the smoke screen.

This is how people, the consumer is being duped and they don't even realize it.

And so.

The volume is the $19,700 of actual money, of dollars that's gone out the door. The rate is simply the calculation that determines based on the amortization, how much money is gonna walk out the door. And what's interesting about this too, Jay, is that the thing that I always wanna, always like to isolate is that if you're in that period of time, you know, here's year one, here's your two, here's your three, here's your four and five. Well, in Canada, the typical, you know, mortgage or whatever is gonna refinance or reset itself or what have you renegotiate that within about five years. A lot of people break those contracts. It's extreme. Um, there's penalties, of course, of doing that, but even if you just went out that five year period. Well, I don't know about anyone who's listening to this, but I'm guessing that your life five years ago versus today is different, right? Maybe there's a, there's a couple more kids that have arrived to bless your family or grandchildren or your, your job or business has changed and you have to move across town, move to a different place. You want to move from being in the inner city to being out on an acreage. So your life is constantly changing and dynamic. And what we thought was going to take place five years ago versus what's actually present for us today is a totally different scenario. And so that's where a lot of people, despite thinking about it maybe in advance, they're in a position where they're resetting or refinancing those loans, or they're selling a property and going and buying a more expensive one because their needs have changed.

And if he sells it, if he sells it, it's even worse.

Refinancing it is one thing, but if he sells it, then it's even worse because the proportion never gets any better.

You're starting over. You're going all the way back to the very beginning. You're five years later, but you're starting the kickoff point of that new mortgage all over again at the point where it's its most expensive. And so that's why Nelson, in his book, he identified that, that cycle, that process is relatively consistent for a wide swath of North American families. And it's not, you know, not to say that any one individual is the person that would be doing it, but it's very common for a lot of people. And so that's why he identified that. What percentage is it, Jay, that he talks about that is going to interest throughout a person's lifespan?

Well, he talks about on page 18. This is such a powerful, powerful statement from Nelson. He says, look, the proportion never gets any better because he takes on a new mortgage and he starts all over again. He thinks that he is buying a house, but all he is really doing is making the wheels of the banking business and the real estate business, in that order, turn. Great post by Mike because he carried it out for the whole amortization period. And he said, well, look, if we carry this out for the entire 30 years and the rate never changed, we paid $186,700 less than 125 grand that you borrowed. That's 61,700 in interest paid. That's 49.42% interest volume. That's the actual cost of the money. And so he says, look, here's the banker's math. Hey, take a look over here. 2.87% interest rate while I rob you blind. Over here, 49.42% interest volume. Math is math. Money is money. Math is not money.

Great post.

Yeah, it's good to see that from Mike. He's such a neat guy. And the key is that we're. And so it doesn't mean that this isn't to say that anyone is, you know, whatever. If you're doing this, it's not bad in your life. It's just awareness by creating an understanding awareness that this happening. It's because we get so common that we just get into the rhythm of doing it and it's what everyone else is doing. Then we get put Into a position where, you know, now we're in that cycle and all of a sudden it's 20 years later, and we've gone through five, you know, four or five of those cycles, and we've kept restarting the beginning component of the most expensive interest of that particular loan. And the mortgage is the most telling one, because the consolidation method that we've become accustomed to over the last 20 years, I would say primarily in the financial world as we know it, has just simply become more aggressive. Well, we go and get a car payment, we get the boat payment. We've got the lines of credits. We went and bought some courses. Oh, we got to put that on the credit card. All these things get racked up. Oh, you know what? Got some equity in the house. Let's go and reset the loan on the house. We'll put all that stuff and bring it back in and we'll put it into a low interest rate and we'll have a lower payment. So, yes, lower interest rate repayment. However, we're going to kickstart off all of that stuff back at. Now the beginning of when more of the dollars is walking directly towards, because of the amortization calculation, towards the banker, it's the proportion.

Yeah, it's all front end loaded.

Right.

And so the primary purpose of us sharing this in this episode is because we really want to communicate the significance of rate versus volume. It is so significant that it can have either a very, very positive impact on your financial future, or it can have an extremely detrimental impact on your financial future. And so understanding the distinction is what's going to determine what outcome you're going to achieve. And so if you truly understand that the process, this process that we talk about, this process of becoming your own banker, the infinite banking concept, it's not a function of rates, it's a function of volume. And more importantly, who's getting the money and who the receiver of that money, who it's being put to work for, regardless of the rate. Right, Rich? We hear all the time one of the most frequently asked questions is, what is the interest rate that the insurance company charges on policy loans? If I had a dollar for every time I heard that question, I'd be wealthier than Warren Buffett right now.

The best part I love is that when you get that question, it's like you can. If you look closely at Jason's face, you can see there's like a little, like a little mental time bomb that goes off in his brain. If he's anywhere near a desk, he's looking ready to flip the table over and kind of I was like, what?

Well, here's the deal. So here's the deal. If that question comes up prior. So let's say it's prior to a person really immersing themselves in educating themselves, understanding the process, that's completely understandable. Right? Because it's a natural question to have. Because our brain is conditioned by mainstream financial advice, by the commercial banking system that you need to focus in on rate. Well, when we respond to that and we say that's an excellent question, the answer is X. Whatever the simple interest rate is that the insurance company applies to policy loans. And then we ask, would you mind if we asked you a question? Absolutely. So the last purchase that you financed or leased or paid cash for, big ticket item, what was it? Oh, you know, I purchased a new boat. Fantastic. How did you buy it? Well, I saved up the money in the bank and I withdrew the money and I paid for the boat. Do you mind if I ask you a question? Sure. Can you calculate for me the lost opportunity cost based on the option that you chose to buy the boat? And that's when you get this. What are you talking about? And once you go through that calculation with someone, they practically fall out of their chair because they say, look, nobody has reviewed that, nobody is having this discussion with me. And so ask yourself this question. If you're listening in, Ask yourself, when was the last time I factored in lost opportunity cost in any financial decision that I've made involving money? When is the last time I've done that? If the answer is never, then the banks have got you in their back pocket. If you can take control of this function and you recognize the significance of the. Here's the train of thought. Why would I borrow capital from a life Insurance company at 6.2% simple interest when I can get this money from the Commercial bank at 2.879 like Mike used in his example.

Right? Right.

Understand the problem. When you make the payment, who is the bank putting that money to work for? The stockholders of the bank. Not the depositor, not the borrower. When you access a policy loan from the insurance company that you co own.

And now you have that interest volume going back into the business that you are a co owner of. If you're dealing with a mutual life company, that mutual life company is solely responsive to the participating policy owners. There are no stockholders, there's no Bay Street, Wall Street, Main street that the insurance company is responsive to and they.

Have to put the money to work.

Precisely.

Only put it to work for the people that own that company, which is the par policy owners.

Precisely. So if you could put more capital into a business that you co own, knowing that the business's mandate is to multiply that capital for your benefit and, and everyone else who co owns the.

Business, how many people do you know do you want contributing money back into that business?

Would you ever want less money going there and more money going to your competitor? It has nothing to do with the rate. It has everything to do with the function of who's getting the money and who the money is being put to work for.

It's powerful and people tend to, and it's, you know, it's, it's not again, it's not right, wrong or different. It's just we have, we, we know what we know at certain stages of our life and, and you know, we're so, we're all grateful that people come into our life and, and provide little lessons for us. And sometimes those are lessons where, you know, we kind of like you get bit on something that you didn't expect and there's a lesson in it, but there's, there's, there's gratitude for that lesson because it teaches us something that we had didn't previously, wasn't previously aware to us before. And so one of the things that I think very important to understand even in this time where we're in this, this uncertainty of there's a, there's an upcoming election going on, there's, there's obviously this, you know, we're still dealing with day 47 million of COVID or whatever is going on there. But when you have, if, if your financial world gets rocked or completely changed at a moment's notice, and it happens for a lot of people at a moment's notice, it's because of an unexpected loss, maybe to the family or someone gets sick or we get downsized. The business that we used to go to work at or we used to own literally is no longer able to open its doors because of some governing mandate that they basically said you're shut down. So that has an immediate and drastic impact on people's financial life. When you have the ability to go and tap into a capital reservoir at an organization that you co own, where you have complete and total control over the liquidity of that capital in an unstructured fashion. So an unstructured loan, you can access the capital. The money continues growing as though you never touched it because you're actually getting it from the insurance company, not from your own pile, then you have total control over that situation and you can be empowered because sooner or later the wheels of the financial life will start kicking into gear again. And then when the time is right, you can start putting back into to that system and replenishing the savings that you've tapped into in a really efficient manner. Meanwhile, the insurance company is going to keep growing your money as though there's no pandemic because it doesn't matter.

There's no mathematical way to attribute the feeling that exists for people when they have the total capacity to be able to dictate the terms of their financial life.

It's a peaceful, stress free financial life when the banks are out of your life. And.

Gosh, we have if people tuning into the episode. If you're visiting with us on the YouTubes at Wealth Bay street, there are a number of client stories where we've interviewed clients who have shared their journey and they explain word for word.

How they've benefited from this process and a wide variety of different things that they've been able to do and the advantages that that's created. But they all have one thing in common. They consistently communicate how it creates a peaceful, stress free financial life. And you can see the difference. You can just see that difference. When.

A client achieves something with the process, it changes their thinking.

Well, and so and you also, you see the difference, you know, as an example with, you know, someone who's, you know, maybe they have a niche in a certain type of real estate investment or whatever and they're very good at that. But then there's still unknowns that happen. Markets shift, there's deals that don't go the way we plan. They did, they do go south time and again. And sooner or later it happens for everyone. You could be the best at investing in xyz. Sooner or later there's going to be an issue that arises down the line. And when you have something like this, the solid financial footing by which, you know, what Nelson would say is, look, you can't go build a skyscraper without a solid foundation. And so this becomes part of that solid foundation of a person's financial life. And when things shift and change in a marketplace that's outside of our control and we're impacted by it, you know, everything's going well, it's going well, it's going well and all of a sudden it shifts and it's like, oh man, what do we do? Oh right. Thankfully I've got this in place to handle just such an occurrence versus the person that didn't have that in place. And if you're listening, you probably know someone just like that. They're running around like Chicken Little because the sky is falling and there's nothing that they can do really to deal with it. They ended up folding up their businesses doors, you know, laying people off, you know, having to start all over. They end up doing, you know, a lot of drastic financial things because they just weren't prepared. They were under capitalized. And the business or the person's financial life that is under capitalized is always the one that's at the highest level of risk when things change.

That is such a good point. Absolutely true, absolutely true. Because when you contrast it with.

Policy owners who have endured all of the setbacks, you know, in the economy and everything that's been occurring because of COVID those policy owners are reaching out and they're saying, thank, thank you, like honestly, thank you so much because we have ready access money and we're okay. And there are no toll takers, there's no gatekeepers, there's no lengthy nosy credit applications. There's no worry. It's complete control, it's access.

It'S contractual authority. As Rich said earlier when we were working on some schematics, he goes, whoa, that's a big word. That's a really big word.

I don't think the word authority is going to look so good when we shrink it in an image, but I'll give it a whirl.

And so.

Understanding the significance rate versus volume can't emphasize enough that it can have a significant positive impact on your financial future or it can be very detrimental.

One of the things that kind of comes up for me here as I'm thinking about this, Jay, is we talked about during this scenario, what resonates with me is thinking about our friend Ryan Griggs, and he isolated quite a bit about the importance of capitalization and how capitalization versus investment.

They'Re almost like opposites of one another. And it's kind of like, I don't know if there's a law for it, like Newton's law, but really opportunity seems to arise. And Nelson talked about this a lot. It's almost like this unspoken phenomenon that exists where opportunities will show up for people who are well capitalized. When you have readily available access to capital, Nelson would say that opportunities will hunt you down, they'll track you down. And what's interesting, what we've heard from a number of people and then we've begin to experience ourselves, is that as you accumulate A capital basis that's ready, liquid and available. Not only does the quantity of opportunities tend to increase, but the quality of them goes up proportionately as well. So your ability to pick and choose the thing that's the right deal for you at that time, it escalates. And so that's not something that shows up, you know, in the mathematical formula. Right. That's the. One of the unseens. The. There's this, the scene, the thing that you can see on a printout of an illustration, the unseen is all the stuff that's not on the page that's happening, actually happening in your life. It's the feelings you have when you put your head on your pillow. It's the excitement that exists because you've got a pile of capital available when the franchise opportunity for the next business shows up. Yeah, you don't see that on the illustration.

That's so true. Because the illustration is something that is just correlated with the tool. It has nothing to do with the process. It's just the product. It's an outline of. Here's what we are anticipating will occur if you just let the insurance company administer this contract all on their own. But the policy owner's behavior is far more critical than the behavior of the insurance company. So when you implement the process.

All of the unseen of becoming your own banker presents itself as real to you and all of the opportunity that it creates. It is absolutely fascinating. And so we have to send some kudos to Mike for such a great thought provoking post. And I'm not sure if we can do this in the community, if we can do a snapshot of the post, maybe just include it as a. Or just point to it or something. So folks in the community, if they want to go back and reference that. But this was fun. Thanks for letting me choose the topic today, Richard. It was good.

You're welcome. You were due.

It was.

Due for a up at bat.

To all of our wealth without Bay street listeners.

New.

Repeat.

We have some folks who have called themselves binge listeners. They binge our podcast, which we're very grateful for. We love to spend time with you. Thank you. Thank you for tuning in. Happy Friday to folks on the Facebooks.

And if you're listening to this podcast on your, whether you're Spotify or itunes or what have you, you know, definitely check on one of the client stories that Jason referenced on some of the previous episodes. And if you're checking us out on the YouTube, make sure you just click on the next video that shows up and you know, check out another one. See if you can dig into a little bit more of this stuff and have some fun doing it. Thanks for listening to the Wealth Without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies, and the mindsets that maximize your wealth.