disadvantage in this scenario.
2. Inflation is much higher than the after-tax return you are receiving, which means
you are losing purchasing power of that $200. In plain English, it means over time,
you can buy less goods and services with that $200! That will be covered in more
detail in chapter seven. So inflation also works to your disadvantage in this
scenario.
3. Your $200 is sitting there doing nothing, so you are losing the opportunity to do
something with it. This is called “lost opportunity cost.” This will be covered in more
detail in chapter six. So opportunity cost also works to your disadvantage in
this scenario.
I only picked three things to analyze. In all three situations the system forces are
working against you—inflation, opportunity cost, and taxes.
As you can see, the model of saving a certain amount of money in a “safe” account is
doing you no good. You are “losing” in many ways because of how the base plate (the
monetary system) was built.
But the teacher’s calculator showed we would end up with a gazillion dollars in a
gazillion years! You now know that was their conditioning of you to see numbers that
didn’t reflect “real” dollars as you will find out later in chapter seven on inflation.
So let’s go back now and “flip” what you know on its head.
You know that the bankers have their system set up for you to use but to make them
richer, not you. One of the ways they squeeze money out of you is with inflation among
other things. One “hack” we use is debt as was mentioned before to counter these
“forces” that were created. Debt is actually more than just a hack, it is a weapon. Debt as
a hack works because of the way the base plate, the (monetary system) was built.
Before we dive into debt, first let’s talk about what is “good debt” and what is “bad
debt.” “Good debt” is debt that we use to purchase assets that appreciate or pay us
regularly, or both. “Bad debt” is consumer debt that takes money from our pocket, such
as credit cards, auto loans, etc. In this book, all debt we talk about is good debt, but more importantly, good debt that is structured correctly, because “good debt” can hurt us
if structured incorrectly. Currently, most investors seem to structure their so-called “good
debt” incorrectly. More on this later.
Now, let’s get INTO debt, specifically, “good debt.” This simplistic example is here to
illustrate a point. Later in the book, we will expand it a lot and improve it.
Let’s say you purchased a $100k asset with 6%-interest debt, and let’s assume you
decided to pay the debt down with the $200 per month you were going to “save” up.
You don’t do this for the sake of buying an asset, but rather to get into well-structured
debt. This statement will become obvious later. For now, notice how I said that. You buy
the asset to get into debt, not the other way around. I will expand on that later.
So here are some of the characteristics of your loan:
· By using the $200 per month to pay against the loan, you are essentially “saving”
6% (in this example), which is similar to making 6% tax-free. So taxes work to
our advantage—i.e. we are not paying taxes on “saved” money. As a
reminder, previously, you were depositing the $200 into an account, being paid a lot
less than 6%, and paying taxes on that measly interest rate.
· By using debt, you are using other people’s money to buy the asset, and not our
money. That means you are not losing the opportunity of buying the asset in the
future for all cash, you are buying it today. So you are gaining the advantage of
the opportunity, and that works to your advantage.
· Since you are using debt to buy the asset today, and you are paying for it over
time, you are using the “time value of money” to your advantage. That essentially
means you are paying for it with future money. The $200 payments are spread out
over many years which means it is “cheaper” money. This allows you to use inflation
to your advantage. In other words, inflation works to your advantage! More on
this later.
We use our understanding of the financial system to turn things around. By using this
understanding we are not playing against the creators of the financial system. Using the
right tools, you are now aligned with the creators of the financial system and the system
now works for you, not against you. You are not “partnering” with them, you are simply
hacking the game of finance that they created to improve your lifestyle. The result is that
your net-worth skyrockets over time from the simple example above—automatically.
That is how you play the game.
That is how WealthQ was discovered.
So what is the most important strategy to move you from the “Paying” side to the
“Receiving” side of the Wealth Equation? It is debt. But only the right type of correctly
structured debt.
It is DEBT that allows you to move from the “Paying” side of the Wealth
Equation to the “Receiving” side, but only the right type of correctly structured
debt.
However, you know debt can also hurt you. Debt is a double edged-sword.
Sophisticated investors, called “Debt Millionaires” know how to measure, control, and
manage debt, and use it to build wealth and move them to the right side of the WealthQ.
We will cover some of these strategies later in the book.
* * *
Emile had explained how the financial system works, how interest really works, how
big bankers use inflation to work to their advantage and not for the average consumer,
how taxes are really just interest payments, the monetary system, and also addressed
many other things.
It all started to make sense to me.
But it seemed overwhelming.
He kept assuring me that anyone can play this game of finance and win by simply
understanding the game.
The banking financial structure started to remind me of the movie “The Matrix.” We
are all pawns in this game of finance, but once our eyes are opened, we can indeed use
the available tools and knowledge to make the system work for us. Understanding the
WealthQ was the key.
Chapter Summary
· We are all players in the game of finance. To play the game better, it’s important to
understand WHO created the game (the financial system), and then HOW the system
works, which includes the monetary system etc. Finally we must question everything
we have been told about money and investing because these beliefs were spread to
serve the creators of the system.
· The secret to moving from the “Paying” side to the “Receiving” side of the WealthQ is
DEBT. It has to be the right type of correctly structured debt.
· The three new terms we have introduced are:
o The Wealth Equation (aka. WealthQ) which has 2 sides in the equation; the
“Paying” side and the “Receiving” side.
o The WealthQ Method is the method of investing that focuses on moving the
investor to the right side of the WealthQ.
o The Debt Millionaires are those investors who have implemented “The WealthQ
Method” and have mastered the use of debt to move to the right side of the
WealthQ.
Section Two
The Wealth Equation
Chapter Five
Moving to the Receiving Side of Interest
“But is it that bad to be on the left side of the WealthQ” I asked everyone. “I mean,
how bad is it?”
The silence was deafening.
My mentor looked at me and then uttered these words “The people on the left side are
slaves to the system! They will spend their entire lives being slaves to the system, and
what’s worse they will never know it!”
“Slaves to the system”—those words kept resonating in my mind. They were very
powerful, image provoking words.
“Okay” I said. “I understand that I need to move to the right side. I now understand
that debt is the key to moving to the right side. How do I tackle each of those forces you
mentioned?”
“Let’s start with interest first, It’s the easiest to grasp” said Emile.
* * *
Albert Einstein said, ‘Those who understand interest, earn it, those who don’t, pay it.’
There is so much significant meaning in that statement, a lot more than most people
realize. Let’s dive in.
The Problem with Interest
Imagine a world with only two people, Bob and Carl.
Bob has $1,000, and that represents all the money in their world.
Figure 3: Bob and Carl—
$1,000 represents all the money in their world
Carl needs $500. So he borrows it from Bob at 10%. Carl agrees to pay Bob back $550
(principal and interest).
Sometime later, Carl pays back $500 of the $550. Bob now has his $1,000 back, and is
awaiting his remaining $50 in interest. But the $1,000 represents all the money in their
world. From where would Carl obtain the remaining $50?
Figure 4: Carl borrowed $500 at 10% from Bob. Carl now owes Bob $500 in principal and
$50 in interest (annually)
Carl can do one of two things: Carl can work for Bob for $50 in lieu of paying him the
$50, or Carl can borrow the money from Bob to pay Bob back.
Let’s consider the latter. Carl borrows another $500 at 10% interest. He agrees to pay
Bob $550 (principal and interest), in addition to the original $50, in unpaid interest. Carl
now owes Bob a total of $600.
Sometime later, Carl pays Bob the second $500, and now has $100 of unpaid interest
still to pay. However, Bob now has the whole $1,000 that exists in their world. Carl has
no way of paying Bob the remaining $100. Once again, he has two choices—work for Bob
or borrow more money.
By now, I hope you see that as long as Carl keeps borrowing money from Bob, he will
owe more and more over time until the point where he will have to work for Bob at some
point.
There actually is a third option. Carl could file bankruptcy.
The point of this story is that as long as someone charges interest, this “created”
money does not really exist. Therefore, ultimately, someone will have to work for it, or
keep borrowing money until they work for it, or at some point, file bankruptcy.
There actually is another choice. If Carl worked for Bob, and Bob paid Carl enough to
make his payments, Carl could keep working for Bob until Bob was paid off. So,
eventually, Carl will be obligated to work for Bob or declare bankruptcy.
On a side note, if you are paying interest right now, we need to change that. But back
to that a little later. Let’s continue with our flow.
One can argue that someone could borrow the money, create something of value, such
as bake some bread, and profit from it. That is true, so let’s expand on that.
In the next diagram, we have a banker lending money to a producer (baker in our
example) to produce a product (bread in our example).
Figure 5: Three Teams in This World
The producer produces the product and sells it to the consumer. Note that the interest
charged by the banker is being passed along to the ultimate consumer of the product.
That means the consumer ultimately pays the interest. Note they (the producer and the
consumer) have to work hard to pay that “created” money.
Look at this transaction again, I recommend that you think this all the way through. It
is not easy. But at the core of it, we end up with the three teams: consumer, producer
and banker.
The consumer borrows money from the banker and pays interest.
The producer borrows money from the banker, creates a product or service, and
passes the interest to the consumer, which ultimately means the consumer pays for the
interest along with profits to the producer.
Yes, there is value to the consumer. But let’s focus on the money flow here.
Ultimately, the consumer pays in every scenario, by paying the banker directly (think
about your credit cards for example), or indirectly through the producer by buying a
product where the producer passed on the interest that the banker charged the producer.
When you look at the system it is no surprise that with many couples, both have to work
and are still barely making it. I hope this is starting to make clear for you why 34.5% of
the average American’s take-home income goes to financial institutions to cover the
interest alone—they are working for the banker!
You might be wondering why I have “Investor” near producer in the previous diagram.
Investors do a similar thing that producers do. For example, with real estate investors,
their “product” just happens to be rental properties. They need to sell a valuable product
to the consumer for the consumer to “buy” this product. The real estate investor is doing
just that. They borrow from the banker (a mortgage) to buy their rental property, and
then rent out that property to the consumer, and pass the interest payment on the
mortgage to the consumer through the rent.
Now, that might seem unfair that the consumer ends up paying for interest from both
sides, directly to the banker and indirectly through the producer. Well, there are several
ways to look at this. At the end of the day, the consumer is receiving something of value,
and they are willing to work for it. There is nothing wrong with that.
Lenders create new money that doesn’t exist with interest. Someone has to
borrow more money or work to pay the interest off.
So, what’s the point of all of this? It’s quite simple.
There are 3 teams in this world, consumers, producers and bankers.
Consumers pay interest, and they end up being the slaves to the system—working to
pay off “created” money that doesn’t exist!
Going back to what Albert Einstein said, ‘Those who understand interest earn it, those
who don’t, pay it.’ He was really saying that you can be on one of two sides, the master
or the slave depending on if you are earning it or paying it. Those who understand
interest and what it does, position themselves on the earning side (masters), otherwise,
you are automatically on the other side, a slave to the financial system. Unfortunately
many people have lifelong journeys of paying debt.
To be on the “Receiving” side of interest, you can be either the banker or the producer.
You can either create interest or pass it on and make money off of it. This will be
explained in more detail a little later.
To be on the �
��Receiving” side of interest in the WealthQ, you can either
CREATE interest or PASS it on to the others.
Most of the population is on the “Paying” side of interest. This includes interest on
mortgages, car loans, student loans, furniture loans, credit cards and a host of other
things. In fact, it is believed that the average American spends 34.5% of their take home
income on interest, not principal and interest, but rather interest alone over their lifetime.
The world is divided into three teams: the consumer, the producer and the
banker.
Bankers and producers are also consumers, but they are bankers or producers first;
consumers second.
Every person on this planet is in one of these three teams. There is no other choice. By
default, people start as consumers. The rich are producers and bankers.
What most people don’t realize is they can also be on the “bankers” team, as
explained in my previous book The Banker’s Code.
Imagine Jack goes shopping at his favorite retail store. He ends up buying $500 worth
of goods. He uses his credit card. By doing so, here is what happened behind the scenes.
· Jack paid the banker in two ways—he paid the banker interest directly on the credit
card. Then he paid indirectly because of the producers who passed the interest on
their loans from the bankers into and as a part of the cost of the goods in the $500
purchase.
· Jack also paid a profit to the producer on the purchase.
Jack, the consumer, is needed to drive the economy. He is on the “Paying” side of
interest. The banker was on the “Receiving” side, and so was the producer, creating an
“arbitrage” situation—borrowing money from the banker and passing the interest cost on
to Jack the consumer and then keeping the profit.
Also, as mentioned in my previous book, The Bankers Code, any individual can become
a lender. In fact, with the boom in peer-to-peer lending (and crowd funding), even more
so now, anyone can become a lender.
But there is more to it than that
Here is a caveat though which may seem counter intuitive. Lending might be good for
interest, but lending can also be very bad for inflation! So it’s not that simple.
When banks lend money for 30 years for a low interest rate, inflation works to their
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