Most of your income goes to housing, cars, and other expenses. Interest on those debts takes a big chunk: about 5 cents of every 20 cents spent on cars. A $400,000 mortgage at 2.29% costs $973 in interest alone the first month, with most early payments going to interest, not principal.
Questions this video answers
$400,000
2.29% (assumed fixed for 25-year amortization)
25 years
$1,880
$973
Chapters
If you understand the problem, you'll know what to do. The solution will become clear. So that's why we're taking time today just to talk about the problem. We want you to understand that and then we'll get into the solution. So for the 20 cents that the average family is sending away to pay for that automobile, 5 cents is interest. That's the volume. It's not the interest percentage, that's the volume of interest.
This is a pretty powerful statement. If you understand the problem, you'll know what to do. The solution will become clear. So that's why we're taking time today just to talk about the problem. We want you to understand that and then we'll get into the solution. So this here is a graft of average pattern of spending for Canadians. Now this isn't, you know, your example. This is an average of a group of people. So as we go through this, I'm just going to show you a few things. First, we're going to talk about how much the average family spends on automobiles. So if you think about this is about take home pay. So every dollar that comes into the home, 20 cents of that dollar is going to purchase automobiles. Here in Canada. Now, everybody's not the same. Again, remind yourself this is about averages. Next it's the cost of housing. So for every dollar that's coming in, 30 cents is going towards housing costs. Next, it's the rest of the cost of living. So that's where you get, you know, gas for your vehicle, power, heat, all the food, the groceries, all those pieces, chew up the other 40 cents out of that dollar and what does that leave us with? 10 cents. Now we're being pretty generous because the average family in Canada doesn't save 10 cents. But for this illustration, that's what we're going to use now to get you and help you understand what the real problem is. This is not it. You know, the pattern of spending is not it. It's like people have to live, you have to have things in life. But this is the problem. It's the volume of interest that goes with each one of these. And as we walk through and look at that, we're going to look at what percentage of that particular group of spending is going to the volume of interest. So let's just talk about the automobiles. So for the 20 cents that the average family is sending away to pay for that automobile, 5 cents is interest. That's the volume. That's not the interest percentage, that's the volume of interest. So when you think of that that's 25%. 5 cents out of 20 is 25% of the 20 cents is going to interest. And you can just use that same way to determine how much the volume of interest is going away in those other categories of spending. So when you look at all that, it amounts to 35% of the volume of money that you're spending is going to interest. Okay, so I'm just going to draw a line from here right down through here. And the thing that I wanted to use this line for is to help you understand just something I want you to see as part of this. Now, on this side is savings. Now, when it comes to the financial world, this is where most of the energy is put. When someone talks to you about what you're doing financial, they're going, okay, so if you have this money and it's, it, you know, here's, I'm going to help you improve the results with your savings. So, Vern, do you mind stepping in for a second? I'm just going to ask you question now what I'd like people to do for us today. If you're working on your savings and you're working on getting a rate of return for your savings, what kind of rate of return would you like to get on those savings? You were saving 10 cents and you decided, you know, you're working with somebody and they said, hey, let's improve that by 10%. So what's your rate of return on 10 cents at 10%? Well, that's one penny. That's what it would be. Your actual savings would be going up by $0.01. And if it was 20%, it would be going up by $0.02. And this is where what I wanted to point out, this is where most of the financial world spends their time focused on. I'm going to get you a really good rate of return on your savings. Now, what I wanted to point out, if you focus on the infinite banking concept and what we've been talking about, where you end up recapturing the interest that you're paying to others, well, that kind of looks like this. Now, let's just talk about the automobile. Say you're able to take this 5%, which in this case is $0.05 out of every dollar that you earn, and you were to move it over here to this side and stack it on top of what you're doing over here. That's a 50% improvement over what you were doing before.
That's the difference. You put 5 cents on top of 10 cents, that's 15 cents. That's a 50% improvement. Now, if you get started doing this in your life, isn't that a better outcome than focused on getting a 10% return on the savings you got now? And that's what this process allows you to do. And we're going to get more into this just to help you understand that. But I just wanted to help you understand that this infinite banking concept is about helping you move this volume of interest. Like it's already what Vernon said earlier. It's all about recapturing the interest that you're sending away into your own system, into your own world. And that's what this little picture diagram, I wanted to just walk through you with you on it. So anyhow, let's move on because I want to talk about the real truth in lending. And this is going to kind of go back to the question that Vern was speaking about. And this is just an example of a mortgage. And this particular mortgage happens to be a $400,000 mortgage. The interest rate is 2.29%. Now, we're going to say that that interest rate stays the same for the 25 years of this amortized period for this mortgage. Now, that would mean that you have an eighteen eighty dollar payment every month against that mortgage. What's that look like? Well, we're going to look at that. So in the first month, this is what it would look like. The interest volume that would be paid on that loan is $973.
That's greater than the principal. So that's the volume of interest that we're talking about. It's this right here. This is the volume of interest. It's not. It has not, you know, it's not 2.9%. It is over 50% of your eighteen hundred and eighty dollars is going to the volume of interest. That's how amortization works. That's how a mortgage loan works. And this number goes up. This number will go up in the first month. Now, if we walk through this and we just look at, you know, the second month, you see how the interest rate volume came down and the principal volume went up slightly. And that continues to happen with the mortgage every month that you pay it. We're looking now at year one. At the end of that year, you know, your interest volume has dropped and the principal has come up. But if you look over that first year, you sent away some $22,000.
Towards whoever, you know, was the financial institution that you were using for this process, and your principal would have went down $11,000. Now, if we look out a little further, go to year three, you can see that continues interest rate, volume drops, principal goes up. But still, after three years, total of $67,000 left your hands and your principal went down by 34,000. Now, one of the things I always ask people.
Is what happens in Canada about as an average, every five years, some, it used to be even three and a half years was the statistics. The average Canadian would refinance, sell and buy a new home within the first five years of having a mortgage. So when that happens, what you do is you start this process over again. You go right back to here and you start it all over. Now that's just to help you understand that once every time you go through, you know, ending one mortgage, starting another, through buying or selling or by, through refinancing, you start this process over again. Now, again, we have a lot of respect for the banking industry. They're very good at what they do. They encourage people to refinance. And I just wanted you to understand, you know, there's a method to their madness. They want to get a higher chunk of volume, volume of interest, I should say. They want a higher chunk of interest coming at them. And they're very good at making us think that's a good thing for them to do. Now I'm just going to walk out and we're going to go all the way through to the 25th year. So if you had the same mortgage, you kept it for 25 years, as you can see, you would have put 564 + thousand dollars against that mortgage. And that would mean you paid $164,000 in the volume of interest, the amount of interest that would have went into that mortgage. Now, that is not 2.9%. So that's where we go back to what we talked about, that earlier presentation about the volume of interest. It's not about the interest rate, it's about the volume. This 164,000 is the volume of interest that would be paid if you had a $400,000 mortgage and it stayed at 2.92% for a full 25 years, that's what that would mean. Well, that's more like 40%. If you do your math, that's 40% of the 400. It's not 2.9%. So if you want to understand how amortization works, that's a topic for another day. And I just encourage you, reach out to one of us, we can have that conversation with you. But this is what happens. That's the real truth. In lending.
