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"Make Money Work ~ Don't Work for Money!"
I call this "The Disinterested Person's Road to Wealth". It is a plan so simple and uncomplicated that even a person with absolutely no interest in money can assuredly become a millionaire. Here is the complete plan in five easy steps:- Open a Roth IRA.
- Put $2,000 ($166.67 monthly) into the IRA every year.
- Invest the money at a 20% rate of return.
- Do that for 25 years.
- At the end of 25 years, spend your $1,414,242.74!
Most people are through with school and have a job at about age twenty. If they then begin using my plan, they would all be millionaires by age 45! If you were to start the plan at age 30, you would have that truckload of cash by 55. Begin on your 40th birthday and have more than a million bucks by age 65.
Even if you wait until you are 50, you'll have a million dollars to spend over the last 15 to 25 years of your life, with close to a half a million dollars left over to leave to your grand-kids. (By that time, you'll probably be leaving a half million electronic, digital, broadband, Internet, cyber credits?)
This is startling! If you invested at 22% instead of 20%, just a 2% increase, you would end up with $2,107,339.15. That little 2% would earn you an extra $693,096.41.
That is money power. Having the skill to make money work for you, instead of you working for money! It only takes $2,000 a year and many people waste that much on credit card interest or car payments!
"Yes, There is a Secret to Wealth!"
An old time investor once told me, "Always be on the correct side of the cash flow!" Dear friend, that is rule number one when it comes to making money. At all points in your financial life, always have more money coming into your pocket than is going out. Understand how to evaluate every investment, so that you are always on the correct side of the cash flow. Does the investment pay you, or do you pay to support the investment (or advisor).
My "road to wealth" plan above depends on two things: (a) a person having $2,000 each year to invest; and, (b) knowing how to earn a 20% yearly return on their money. It is sad to learn that most people can't do it!
You can achieve financial independence if you have just two things:- The discipline to invest 3% to 10% of your yearly income.
- The ability to make that money work to the maximum!
Investing for a 20% or more return is where the skill comes in and I would like to introduce you to knowledge that can make that easy. It all starts with ....
"The Time Value of Money!"
Every investor (and certainly those in real estate) should understand the time value of money and how it can affect your investments in a powerful way. Time value just means that money now is worth more than money later.
Most investors are introduced to time value when they become interested in "paper" investing ~ an amazing technique for making money. A paper investor seeks to buy various types of cash flows at a discount. This usually means real estate promissory notes.
For example, suppose you sold a house and carried back a promissory note secured by a trust deed for part of the purchase price. Later, you had a need for cash and you found a paper investor who was interested in buying the note from you.
Let's say there are $5,000 worth of payments remaining to be paid on the note. Would the paper investor hand you $5,000 as the purchase price for the note? Of course not! He would offer you a discounted price, so that he could make a profit. How would he calculate a yield (his effective interest rate) on the note and how much would he pay? He would use a financial calculator or computer program.
Skilled investors always crunch the numbers to be sure they are on the correct side of the cash flow and that they will get the maximum return on their investments.
"You Must Know How to Calculate to Win!"
You, as a real estate investor, should understand how to calculate yields. That knowledge will help you profitably structure buy/sell income property deals and allow you to properly determine a purchase price for any notes that you come across in your real estate dealings. The really creative, money-making deals depend upon this knowledge!
"Even Math Dummies Can Do It!"
Let me confess that I did not do well in my school math classes. I couldn't believe I had any aptitude for numbers. When I began investing, I soon realized I would never be truly successful if I didn't understand how to crunch the numbers.
What a wonderful surprise when I discovered the financial calculator and how easy it was to learn how to use. Finally, I could structure any kind of deal or investment and know exactly what my return would be. I could manipulate terms and fine tune deals to make them as attractive as possible for both buyer and seller.
It's easy when you understand how to use a financial calculator. I figured out the little IRA investment plan above in about 3 minutes using a financial calculator.
A nice little lesson follows. Just skim through it to convince yourself that it really is something you can and should learn. Later, I'll explain how you can super-charge your investing skills.
"Note is a Contract."
Any promissory note is simply a contract that spells out the manner in which a loan will be repaid. It can be repaid with:- a series of monthly payments;
- a series of annual or biannual payments;
- a series of interest only payments with a lump sum principal payment at some predetermined date;
- a series of payments that increase or decrease every 12 months;
- a single, one-time payment of principal and interest;
- or, most any set of terms all parties can agree upon.
No matter how the note is structured, it provides a "cash flow" that will satisfy the debt. The skillful investor must understand how to create or put a value on cash flows.
"Here's a Quick and Easy Lesson!"
Along with the normal keys, a financial calculator has keys that are marked "N", "I", "PV", "PMT", and "FV". Many different companies manufacture them, but the one most often used in paper and real estate dealings is the Hewlett Packard 12C ~ called HP12C for short.
Those special keys on the financial calculator stand for:
N
I
PV
PMT
FV | = Number of payments or periods
= The interest rate
= Present value (or remaining balance)
= Payment
= Future value |
When you begin to do calculations concerning cash flows, interest rates, terms of a note, etc., you will start with a line that looks like this:
"Look How Easy!"
To illustrate how to use the financial calculator, let's start with a very basic promissory note. The note is for a loan of $10,000 at an interest rate of 10%. The $10,000 is to be fully paid in equal, monthly payments over a period of ten years. This is a note with one cash flow ~ the equal monthly payments. Here is the information you will enter into the calculator, so that it can do the heavy work for you:
| N | I | PV | PMT | FV | | 10 yrs. | 10% | 10,000 | | 0 |
The figures you enter into the N, I and PMT keys must all be in the same time frame. If the payments are monthly, the interest must be converted to monthly. If the payments were biannual, the interest and term would have to be converted to a biannual basis ~ and so forth. Most often you find notes that have monthly payments.
The payments in this example are monthly, so the 10% interest rate must be converted into a monthly rate and the ten-year term must be entered as months. Here is how you do that.
Under the N key on your calculator, you put the number of payments (10 years x 12), which is 120.
The note has an annual interest rate of 10%, so you must divide 10% by 12 to get the monthly rate. The result is .83%. That number is entered into the calculator under the I key.
The amount of money owed on the note is $10,000. That is the present value of the note and it goes under the PV key.
This note has no future value (balloon or lump sum payment), so you enter 0 under FV.
You have nothing under the PMT, because you do not yet know what the monthly payment will be. You must calculate that figure. You do know four other elements of the note, the N, I, PV and FV. Whenever you know four of the elements, you can find the fifth. In this case, you just solve for PMT. To do this on the HP12C, you just push the PMT key. The answer will be $132.15. Here is how it looks on the line.
| N | I | PV | PMT | FV | | 120 | .83 | 10,000 | 132.15 | 0 |
All You Need Are Four Numbers!"
Any time you know four elements, you can find the missing one. Try entering the following numbers and solving for N.
| N | I | PV | PMT | FV | | - | 10% | 10,000 | 132.15 | 0 |
Remember to change the 10% under I to .83 for monthly interest. When you press N, you will get 120. How might you use this knowledge in a real estate transaction?
"You Make Money with Numbers!"
Suppose you were going to carry back a note for $10,000 and the buyer of your property offers to pay $132.15 per month. If the interest rate being charged by loan brokers for second mortgages was 7 1/2%, you decide that you are entitled to 14%, because you are helping the buyer get into a home that he might not otherwise be able to afford. You would simply enter the numbers as they are in the line above with 14% under I and solve for N. That would indicate that it would take 185 payments, or 15-1/2 years to pay off the loan.
You decide you don't want to wait 15 plus years to get all of your money back, so you insist that he pay $200 per month. When you run that calculation, you find the loan will be paid off in 76 monthly payments, or 6-1/3 years. All other numbers on your line stayed exactly the same.
Always "clear" your calculator before starting a new calculation and always enter 0 under any element not being used in a current calculation. Always change the payment amount to a minus when you enter it. (Your calculator's instruction manual will show you how to do that by pressing one key. Very simple!)
"I Think You've Got It!"
Let's try one more note just to be sure you understand this first step in using a financial calculator.
Note #2: $20,000 loan. 12% annual interest. Eight year term. No balloon, so no FV. What will the monthly payment be?
| N | I | PV | PMT | FV | | 8 yrs. | 12% | 20,000 | | 0 |
Your answer should be $325.06. Did you remember to convert N and I to monthly values?
One More Example
I will illustrate just one more useful calculation out of the many that you should know. How to find the remaining balance (amount still owed) at any point in the flow of payments.
To determine the amount still owing on a loan: place the remaining number of payments under the N, the interest rate of the note under the I, the monthly payment under the PMT, and solve for PV.
If someone brought Note #2 (the example above) to you one year after it was created, how would you determine the balance that remains due. Start with what you know about the loan. The payment is still $325.06 per month and the interest rate remains at 12%. You also know that originally there were 96 payments to be made, but now, a year later, 12 payment have been made. Subtract those 12 payments from the original 96 that leaves 84 payments still due. Put those on the line so you can see how the calculation will unfold.
| N | I | PV | PMT | FV | | 96 | 12% | | 325.06 | 0 |
Remember to convert the 12% to monthly interest, then solve for PV. The result is $18,414.15. If you held this note and the payor asked to pay off the note early, that is how you would determine how much you should receive. This is powerful stuff!
"The Many Uses of Numbers!"
Understanding the time value of money and how to use a financial calculator is critical to successful investing. It also will help you with all of the financial decisions you face in life. Look how it can help if you were buying a car.
Let's say you are going to buy a $15,000 car. It will be a five-year loan with monthly payments of $317.60. There are miscellaneous financing costs that add $300 to the total being financed. Here's how it would look on the line.
| N | I | PV | PMT | FV | | 60 | | $15,300 | 317.60 | 0 |
What is the rate of interest you will be paying for the car loan? Solve for I and you learn you are paying .75 per month or 9% yearly.
Make Big Bucks Buying Notes!"
Let's suppose the holder (person receiving the payments) of the above note offered to sell it to you. What would you pay for it? Your policy is to never buy a note that would not provide you with a yield of at least 20%. How much should you pay for this note to get that yield? Easy! Just put 20% (converted to monthly interest) under the I and solve for PV.
| N | I | PV | PMT | FV | | 60 | 1.67 | 11,987.67 | 317.60 | 0 |
If you bought the note for $11,987.67, you would be earning 20% on your money. Nothing changes for the person making the payments. She/he still makes 60 payments of $317.60. Since you paid less than face value for the note, you have a higher yield.
"Number Crunching Is The Key To The Value!"
That is exactly the kind of transaction note buyers perform regularly with yields that sometimes run well over 50%. But that just scratches the surface. There is a world of profitable opportunities waiting for the investor armed with this knowledge.
If you would like to learn more about creative real estate financing and how to buy and sell real estate notes for profit using the financial calculator ....
Click Here.
Judgment investing is a paper profit opportunity that very few people know about. I have a complete system I would love to share with you.
For information just ....
Click Here.
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