Banks Should Post Warning Labels

By: Lonnie Scruggs
Submitted: 10:55AM on Saturday 08 November 2008

Today’s mail brought an unsolicited brochure from one of the local banks entitling me to open a premium interest rate CD or IRA account. In large bold print, it goes on to say I will earn one of the highest rates available in years. Their chart shows how I can invest $1,000 for 2 years and earn 5.5%, 3 years 5.75% and if I leave my money in their bank for 5 years, I’ll earn a whopping 6%.

And if these rates aren’t bad enough, I just checked to see what interest my bank is paying on a checking/saving account that we use to pay monthly bills. And I wish I hadn’t looked. That account is paying 1.88% interest. It’s true we don’t keep much money in that account, just enough to cover the necessary monthly bills, but I’m wondering if I might be better off to stick the money under the mattress.

I think banks should be required to post the following warning labels on all their advertising material saying: WARNING! BANKS ARE HAZARDOUS TO YOUR FINANCIAL HEALTH! After all, the government requires warning labels on other things that are harmful to us, so why not require the same type warnings for our hard earned money.

This reminds me of the age old saying, “If you think education is expensive, try ignorance”. I can’t imagine how much money must be invested in CD’s, T-Bills and bank accounts by people who never learned how to do better with their money. You don’t have to be a financial genius to learn how to make good returns on your money, but you do need to understand financing and learn how to make your money work at a rate of return that will give you a good profit after allowing for inflation and taxes. And 5%-6% just won’t do it. Let’s play “what if”.

What if you know a person that wants, or needs “something”, but that person doesn’t have the money and can’t get bank financing to buy that something. That something could be a mobile home, car, truck, boat, furniture, appliances, shed, deck, computer, new carpet, a new roof, auto repair, or a zillion other things. Since I’m partial to used mobile homes, let’s say that “something” is a mobile home and see if we can create a note paying far more than any bank or CD will pay.

This is what I call my 10-10-10 rule. We buy a mobile home for 10% below fair market value (FMV), sell for FMV, with 10% down and 10% financing. (If you can’t negotiate to buy 10% below fair market value for cash, then you need to take a seminar on negotiating). Let’s do a deal.

Deal #1. We find a used mobile home, or “something”, with a FMV of $5,000 that we can buy for $4,500 (10% below FMV). We sell for $5,000 (FMV) with 10% down and carry a note for $4,500, 10%, 25 months, $200 per month. We have $4,500 left in this note. If I punched the right buttons, that’s a 21.6 % return.

Deal #2. Now, let’s increase our prices and see if this theory still works. We find a home with a FMV of $7,500 and buy it for $6,750 (10% below FMV). We sell for $7,500 (FMV), 10% down ($750) and 10% financing. We carry the note for $6,750 for 35 months with payments of $223.14. We have $6,000 left in this note. Is that 18.5% return?

Deal #3. We’ll now buy a home for $10,000 (FMV) for $9,000 (10% below FMV) and sell for $10,000 (FMV), 10% down and a note for $9,000 payable $254.85, 42 months. We have $8,000 left in this note and that works out to be 17.2% return.

It takes 12 years for money to double at 6% rate of return. On your $5,000 deal (#1) where you’re making 21%, your money doubles in 3.6 years. On the $7,500 deal (#2) (18.5%), about 4 years, and on the $10,000 deal (#3) (17.2%), 4.4 years. In your worse case scenario (17%), your money doubled almost 8 years sooner than the person with money in CD’s and banks. Is it possible that with a little education about notes and financing, that you are at least 8 years ahead of the person that didn’t learn how to make more than 6%?

Let’s do a comparison and see what a terrible price the 6% investor is paying for not learning about money. It takes 12 years to double your money at 6%. If you invest $1,000 at 6%, (compounding monthly) you will have $2,050 at the end of 12 years. But if you can make your $1,000 earn 17%, (deal #1) you will have $7,581 after 12 years. At 18.5% (deal # ) you will have $9,052. And at 21% it will be $12,160.

Even in your worse case scenario (17%) you will have over three times more money than the 6% investor. At 21% you will have almost five times more money. And that’s only for 12 years, if you want a real shocker run the numbers for 20-30 years.

I suppose we could sum this up by saying, “ The More you Learn-The More You Earn. This is a good lesson in compounding power. And a good lesson why so many people stay poor, and the banks get rich.

Happy investing,

Lonnie