Busting the Interest Rate Lies

“The hard part about telling the truth with numbers often isn’t finding the truth. It’s having the guts to share the truth.”
– Seth Godin

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Discover the Whole Truth About Money and How You Can Keep Control of Yours!

Interest rates can be deceiving.

Few people understand how they really work, and financial institutions (from financing and mortgage lenders to financial advisors and stock brokers) often take advantage of what we don’t fully understand for their own benefit.

Best-selling author and thought leader Seth Godin recently published a blog post titled, “On average, averages are stupid.” He goes on to explain why he says that averages are “stupid”:

“Across our 100 locations, sales on average are up 3% last month.”

This tells you exactly nothing.

It turns out that ten of the outlets each saw their sales double while most of the other ones are stagnating or even decreasing in sales. That’s the insight.

Averages almost always hide insights instead of exposing them.

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Have We Been Misled?

Certainly averages hide insights when it comes to average vs. actual returns of the stock market.

“Average rates of return” are often touted by financial experts, and yet simple math can show us that Average does not equal Actual.

Pretend that you invested $100,000 into a mutual fund that had promised an average rate of return of 25% if you left the money alone for 2 years. Sounds pretty good, doesn’t it!?

Now, let’s say that it earned 100% in the first year. After the first year, the investment would look like this on a cash flow financial calculator:

Now let’s say that the fund earned -50% (it lost 50%) in the second year. Now your investment looks like this:

While your fund’s average rate of return was 25% (that is mathematically correct, 100 + -50 / 2 = 25%), its actual yield was 0% because you ended up with only the $100,000 you started with.

As we can see, Average does not equal Actual. Average rates of return are usually misleading, and never to the benefit of the investor. As a matter of fact, average rates or return almost always less than actual rates of return (except when rates never fluctuate, in which case they are the same). The roller coaster ride of the stock market can make it seem like accounts are doing better than they are, but when interest rates are calculated correctly, the results are often very disappointing.

There are other aspects of interest rates that aren’t what they seem, either.

For instance, mortgages. Everyone assumes that a 15-year mortgage is the way to go, if you can afford it. After all, you’ll “save” all kinds of interest, won’t you?

On the surface, it seems so. But here’s the problem: when you compare a 15-year mortgage with a 30-year mortgage, you’ve got to do so over a 30-year time period. And you have to consider the whole picture that each mortgage would have on your finances.

Remember the 7 Principles of Prosperity? Principle #2 asks us to SEE the whole picture of our personal economy. And Principle #3 asks us to MEASURE opportunity costs. And when we do those two things… the answer may surprise you!

You see, a 15-year mortgage will lower your interest payment… but it won’t lower your interest COST. You will either “pay up interest, or pass up interest.” With a 15-year mortgage, you’ll pay less interest to the lender than with a 30-year mortgage, and you’ll pass up interest that you could have earned by saving or investing the difference!

Now, if you’re the kind of person that is more likely to spend the difference than save it, a 15-year mortgage could be a better choice. But what if you could earn interest on the difference?

If you could put that money in a side account and earn even just the same modest interest rate as you’re paying on your mortgage, you would actually come out ahead! To understand this though, we have to consider the mortgage interest tax deduction as well as opportunity cost, and we have to compare both mortgages (a 15-year mortgage vs. a 30-year mortgage with a side account for saving/investing) over a 30 year period.

Most people try to compare 15-year mortgages over 15 years with 30-year mortgages over 30 years, but that is not a valid comparison. We have to compare both of them over the same time-frame in order to have a correct mathematical comparison. (We make the comparison in the book, complete with Truth Concepts software screenshots so you can see for yourself!)

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To better understand interest rates and the impact they have on our finances, we highly recommend reading Busting the Interest Rate Lies, our new book! I wrote this book with expert help from Mona Kuljurgis and others, and I also relied heavily on Truth Concepts calculators, developed by my husband Todd Langford. Busting the Interest Rate Lies is now available on Amazon.com! You can order the paperback right now, and it is available as a Kindle ebook and now Audiobook as well.

Busting the Interest Rate Lies fills in important gaps about essential but little-understood financial topics you won’t hear about from most financial advisors. It corrects common financial myths such as:

Purchasing a car with 0% dealer financing is the best way to buy a car
You always “save money” by paying cash for major purchases
A 15-year mortgage is more efficient than a 30-year mortgage
You can evaluate an investment by its “average” rates of return
Earning a higher actual rate of interest on your investments is the most important factor in building a small fortune over time

Kim D. H. Butler

– Author and Founder

Founder of Prosperity Thinkers, LLC, Kim Butler has shunned common financial products such as stocks, bonds, savings accounts and CDs in favor of creative life insurance strategies outside of the typical financial planning “box.”

This money philosophy comes from the Prosperity Economics Movement, a non-profit organization co-founded by Butler, along with her husband, Todd Langford (a financial software developer who is always checking the math). The Prosperity Economics mission is to educate the public about “Wealth Without Wall Street.”

Find out more about Kim here

“…financial services expert Steve Savant calls Kim Butler…a Joan of Arc crusader separating financial fact from fiction.“

– iReport.cnn.com

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