The Market That Was, That Is & That Will Never Be

“The surest way to ruin a man who doesn’t know how to handle money is to give him some.” — George Bernard Shaw

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*Here’s what killed your parents and grandparents 401(k)’s, IRA’s and pensions. David Li’s Gaussian copula function as first published in 2000. Investors exploited it as a quick — and fatally flawed — way to assess risk.*

Money isn’t the root of evil. Money is the root of everything and being uneducated is evil. Taking risk with other people’s money simply does not fit into economic theory. Some people make finance too mathematical. Banking has become so ginormous that its outstripped all other businesses in the world. At this point it should really just be a service for all of these other businesses. Essentially, everyone is now working to service the banks. There’s a problem with this formula, system, model and however else you’d like to slice it.

To me financial illiteracy is like being in a rain storm and trying to jump in between the raindrops…eventually it all catches you at the same time. My goal, purpose and reason why I’m here is purely the education of finance to as many individuals as possible, who want to listen to a Millennial.

Growing up I knew virtually nothing about finances. Do you know why? It’s because we’re not taught it in school! Shocking, right? For me, I studied economics and business at Washington & Jefferson College. From 2011 until 2015 when I graduated there was only an emphasis in financial economics. Only a handful of people from my understanding were studying it.

It wasn’t until the Class of 2015 graduated in May that the economics & business department rewrote the curriculum to include both a major and minor in financial economics. Why wasn’t it there before?

Apparently, they didn’t want us to know what we didn’t even know. As an example, maybe it would have been beneficial for them to go over compounding interest with us. When I say compounding interest I mean both the good version (Investments) and the bad version (Student Loans/Houses).

You’ve probably heard the statistics: Americans owe nearly $1.3 trillion in student loan debt, spread out among about 44 million borrowers. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year.

Let’s dive a little bit more deeper into this………why not?

General Student Loans

First, let’s start with a general picture of the student loan debt landscape. The most recent reports (according to indicate there is:

  • $1.26 trillion in total U.S. student loan debt
  • 44.2 million Americans with student loan debt
  • Student loan delinquency rate of 11.1%
  • Average monthly student loan payment (for borrower aged 20 to 30 years): $351
  • Median monthly student loan payment (for borrower aged 20 to 30 years): $203

What was the return on that investment? For some, zero dollars.

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What about houses? They’re assets, right? Let me ask you this question, “When a banker tells you your interest rate is 8% per annum, it is really?” Here’s your education lesson of the day if you learn to read and understand the numbers.

Let’s say you buy a $100,000 home as I’ll keep the math simple. If you make a down payment of $20,000 and borrow the remaining $80,000 at 8% interest with a 30-year term from your bank do you think that was a smart idea?

In 5 years you will pay a total of $35,220 to the bank: $31,276 will be for interest, and only $3,944 for debt reduction. *Similar scenario for student loan repayment plans too.

If you take the loan to term, or 30 years, you will have paid $211,323 total principal and interest, less what you originally borrowed — $80,000. The total interest you will have paid: $131,323.

By the way, that $211,323 doesn’t include property taxes and insurance on the loan!

Funny, $131,323 seems to be a little bit more than 8% of $80,000. It’s more like 160% in interest over the duration of 30 years. It’s unfortunate the banks are not telling the whole truth. And if you can’t read numbers, you’d really never know. And if you’re happy with your house, you’ll never really care. But of course, the industry knows that in a few years you’re going to want a new house, a bigger house, a smaller house, a house on the beach, or a refinance on your mortgage. They know it and, in fact, they count on it. If only there was a way to shred all of that debt.

In the banking industry, a 7-year average is used as the life expectancy for a mortgage. Don’t ask me why they picked 7, I’m simply the messenger at this point. That means banks expect the average person to buy a new house or refinance their mortgage every 7 years. And that means, in this example, they expect to get their original $80,000 back every 7 years, plus $43,291 in interest.

And that’s why it is called a mortgage. It stems from the French word “mortir” or “agreement until death.” The shocking reality is that most people will continue to work hard, get pay raises, and buy new houses with new mortgages. On top of that, the government gives a tax break to encourage taxpayers to buy more expensive houses, which means higher property taxes for the government. *Insert scratching head Emoji here*

Have you ever watched television? I’m sure you’ve seen commercials where handsome athletes, actors or actresses smile and tell you and I to take all of our credit-card debt and roll it into a bill-consolidation loan. Sounds like the student debt and loan forgiveness programs, right? That way, you can pay off those credit cards and carry a new loan at a lower interest-rate. They tell you why it’s “financially intelligent” to do this: “A bill-consolidation loan is a smart move on our part because the government gives you a tax deduction for the interest payments you make on your home mortgage.”

Viewers, thinking they see the light at the end of the tunnel, run down to their finance company, refinance their home, pay off their credit cards, maybe take out a home equity line of credit (HELOC), and feel intelligent.

Ladies and gentlemen, at the end of the day this is what Tony Robbins calls ERBN (emotional reasons to buy now) versus LRBN (logical reasons to buy now). This is why I laugh out loud looking back on economics classes in college where economic theory says consumers make rational choices. It’s far from that! Irrational choices happen daily, which is why emotions overpower logic in consumers decision-making processes.

As I said in the beginning of this weeks post, when bankers say your house or going to school is an asset, they are not lying. When the government gives us tax breaks for being in debt, it is not because they’re concerned about our financial futures. The government is concerned about its financial future! So when your banker, your accountant, your attorney, and your teachers tell you that your house is an asset, they just fail to say whose asset it really is.

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If you have remotely grasped the significance of these words, you might begin to better understand what the eyes cannot see about the game of money. The question you’ve got to be asking now is, “Whose money is it?”

People perceive investing in the market as risky. The bigger mistake is leaving a lot of money in your savings account. There’s a different and better way of doing things than the way you’re doing them now. I recommend finding a fiduciary that’ll help you out with your personal or business finances, finding a solid coach and mentor to guide you along the right path as well as a path of self-education after receiving that fancy piece of paper from your college or alma mater. Lastly and, as mentioned before, money will always be the root of everything. Being uneducated about money is the evil part. Money can’t change who you are. All it does is magnify our true natures.

My Very Best,

Donovan Vogel

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Philadelphia based teaching financial literacy | Prospering all other hours | Writer | Lifter | Reader | Traveler | Freedom & Wellness

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