So, let’s play a game: you loan me a dollar. In about a year, I’ll give you $1.02 back. Not bad huh? You do practically nothing and get a return on your money. Pretty fun game huh?
Now let’s add a twist to the game: I’ll loan you a dollar as well. But at the end of the year, you’ll owe me anywhere from $1.05 to $1.23, depending on how trustworthy I initially felt you were.
I forgot to mention that if you pay me late, you’ll owe me an additional one to three cents. Plus, I’m going to smear your name to others and tell them they shouldn’t loan you anything.
Also, if you don’t pay me at all, I get to take the stuff you bought with that dollar. But if I don’t (or can’t) pay you, I’ll just ask some of your friends to cover it for me.
One other thing I neglected to mention: the dollar I’m loaning you? It’s not even mine! I’m just taking the dollar you’ve loaned me and loaning it right back to you.
Doesn’t sound like too much fun anymore does it?
Although this sounds crazy, it is pretty much the foundation of how the banking system operates. The bank pays you about 2% return on your money and then loans it back to you at anywhere from 5% to 23% depending on what you want the money for and how credit worthy they deem you to be.
You pay late? They charge you additional money i.e. late fees. You don’t pay at all? They take your stuff e.g. house or car. And then they tell others (i.e. credit rating) how much of a dead beat you are.
Finally, if something happens where they can’t pay you, they’re inclined to ask the government (who then pushes it on to you and me) for a bailout.
So the game is best played when you give the loan, not take the loan. Therefore, let’s stay on the Lender side of the table without crossing over to that Borrower side and look at earning that 5-23% for ourselves!
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Brandon and Gina Wilkins are financial coaches and co-founders of Financial Freedom Builders LLC. Mr. Wilkins is also the author of the financial classic, Getting Rich is Simple...But It Ain't Easy! They are available for coaching, workshops and seminars designed to help you take control of your finances.
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