Gotta be honest with you, the title of this article is 100% clickbait and there is a reason for that, if you read until the end you will see that lots of people are allowing some kind of businesses to earn +20% every single year without even noticing it... And the bad part of the history, is that those that pay the expenses are the ones who are getting broke every year because of that.
If I wasn't clear enough this is not an article where I teach you how to earn that percentage on you investment, is about how lots of people (and maybe you too) are paying that amount to others.
In articles before, I mentioned about creating a fund and how much we will need to have a decent amount after a long period of time, in all of them I always mentioned a 7% return and probably you will ask how can I get more?. Well unfortunately that's not the point of this article (but maybe you could open a similar business from the example eh ;D), in this article we are going to talk how daily tools are screwing people while the owners of those tools are making +20% on their investment.
Credit cards: The common devil
Don't get me wrong, I know credit cards are a powerful tool if they are used correctly but we need to be honest: The majority of people don't know how to use them without getting broke.
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
- Albert Einstein
I will never get tired of what Albert Einstein said. Why? well because what he said is one of the things that separates wealthy people from those who aren't. Credit cards are the best example of this and is where we can learn a lot.
Firs, what is a credit card? You will say it's a tool to get money you don't have and yeah we all know that but... What is a credit card? Well, it's the product banks use to get richer while the majority of people get broke and I know this sounds a little anti-establishment guy (which I'm not) but it's an easy way to see it.
A credit card is the perfect example of what Albert Einstein said because He who understands it (The bank), earns it. He who doesn’t (Most of the credit cards users), pays it.
Let's run some numbers to understand it better. Let's imagine you listened to me and you decided to start your fund for your family, you started digging and you found out that earning more than 10% (cashflow) a year constantly is kind of risky so you decided to buy good quality dividend stocks but you saw that you will only get between 2% and 3% from those companies.
So you calculate your returns and you saw that your USD$ 10,000 will need 178 years to reach our target of USD$ 800,000. At that point you started saying "Goddammit that kid on internet fooled me, it's impossible to get the amounts he said" and you went to the store to buy a 82" 8k OLED TV with your credit card because you realized life is too short to think about money, funds, returns and all that shit... And that my little friend, is what Albert said.
How much money I'm giving to my bank?
Well, that useless TV you got with your credit card will make you happy so why should you bother about it right? Happiness is priceless right?.
Let's imagine that useless TV costed you USD$ 5,000 and the bank will let you pay it in a period of 12 months paying only USD$ 500 each month just because you are the perfect client and you always pay on time... Well, your bank will earn 20% on their investment in a year, you should be proud of it right?
Is not only with credit cards
Believe it or not, every day a new system to give credit to people is being cooked and credit is not a bad thing alone but is a dangerous tool if is not used in a correct way...
And that applies to all kind of consumer credits, let's take the example of a car. You wanted to buy a car and you had USD$ 5,000 in your bank account, but the car you want costs USD$ 25,000 so you put those USD$ 5,000 as a down payment and pay USD$ 430 each month for 60 months...
At the end of that period you will have a car which value will probably be only USD$ 15,000 and you will have spent USD$ 25,800 + USD$ 5,000 (the down payment). You spent USD$ 30,800 and you ended up with a USD$ 15,000 liability... What's the percentage you got on your investment? Well, at least your dealer got +20% on their investment.
Do you see a path in these examples? If not, I'm referring to credit used in a non-investment way. If instead of buying the car you put those USD$ 5,000 in a place where at least you get a modest 4% per year and you also add USD$ 430 each month (same amount you would be paying to the car dealer), you will have a total of USD$ 34,540.24 in the same period of time... What is better? a USD$ 34,540.24 fund which grows every single year or a car which price is only USD$ 15,000?
There are two ways to conquer and enslave a nation. One is by the sword and the other is by debt.
- John Adams
Pay on time, avoid paying interest to anyone but you
If you pay on time you shouldn't be charged, follow this: If you can't pay it in cash, most likely you can't afford it and you should not use a credit... I know not all stuff can be purchased with cash like houses but those are different kind of products and sure we will talk about them later.
Imagine how much money people loose every year just because they use credit to buy stuff that won't generate wealth overtime, will you waste your money too? Take care.