finance, what?» Understand your debt, income and cashflow

A Sweet Revenge: Let The Banks Pay Your Debt

Denis Kristanda — Fri, 20 Mar 2009 19:16:27 +0000

Here is the thing. Most of you in one way or another, sooner or later, will probably think that the bank you deal with, is ripping you off. Expensive home loan rate, account keeping fee, monthly fee, yearly fee, transaction fee, exchange fee, settlement fee, break up fee, overdraft fee, loan fee, ATM fee, dishonor fee, name search fee, etc, etc – you named your reason. Well, cannot really blame them as they are in the business to make money by providing financial service, i.e: not charity or foundation that will serve you for free. Now, having said that, how about if there is a sweet way to take revenge to your bank that make them pay your debt: it’s legal, it’s very sweet with very little effort. Interested?… Keep reading. -ksr_tr-

Homeloan/Mortgage and Other Debt

Let start with our debt. The biggest debt that we are involved with, is homeloan / mortgage. The loan itself is long term loan, usually 25 years or 30 years, and the amount is gigantic, several hundreds thousands dollar maybe.

Additionally, we will have many kind of other debt: a personal loan, business loan, car loan, and the most common one: credit card debt. These loans usually have shorter term and the total money borrowed usually less than $100,000.

So, think about them this way. Whose money are these hundreds thousands of dollar money (or more) that we owe? Well, in a nutshell it is bank’s money. Or probably in more general-technically-(more) correct term: all of those money belong to a financial institution (backed by bank or private lender). Yes, those money can be made out of nothing, but this is another matter. Technically, all those money are our liability, but they are assets in the book of these financial institutions.

Let Them Payback Their Own Money

The Bank's Money - Our Debt Money

Now the question is: how about if there is a way to make these banks or financial institutions pay off our debt. Won’t it be a very sweet revenge for you ? Of course !

Surprisingly, it’s not that difficult. It will cost us a bit of money, but the end result is exactly what we want above. How we do it ? By taking insurance.

By taking insurance, in particular life insurance and income protection insurance, as long as you are not underinsured, if something happened to you (sick, accident, death, etc) and you no longer able to produce income, the insurance will pay your cover and in turn you can use that money to pay off all the debt you left behind.

“OK, but it’s not the bank’s money, it’s from the insurance” you might protest. Let us see this. These big insurance companies (Deal only with the big one as you want to make sure they are still around when you need them the most) are usually public listed company and its share/stock are traded in the stock exchange. Who own these stock/share? If you study them carefully, the majority of the shareholder/stockholder of these giant insurance company will be financial institution: investment banks, managed fund, hedge fund, and another financial institution. So, the insurance money is their money as well (direct or indirectly)

Furthermore, when you study about money, you will understand that only bank can ‘create’ debt money out of nothing. So the banks is really in the middle of these money business.

In other words, these banks lent you money, you took insurance, and when you could not pay it (sick, die, terminally ill, etc), they will pay our debt (a.k.a their ery own money). Isn’t that sweet ?

Yes, it’s not free. You need to pay the premium of the insurance on regular basis but the benefit outweigh the cost. Imagine that you have $500,000 life insurance whose premium is $50 a month. These $50 per month, even you accumulate it for 30 years with 10% interest, it’s very small compare to the potential payout. Not to mention the peace of mind factor that really very invaluable and worth much more than $500,000. It’s good to remember that usually the insurance will not pay any money if the claim is due to your own fault (e.g: suicide, fired by employer, etc)

Although this strategy can be applied to any debt that you have, but you will find that taking a debt for business/investment will work the best.

How The Rich Did It and You Can Too

When it comes to borrow money to invest (business or other investment), they will choose (and you can too) to take “Interest Only” loan. It’s interest only, so the principal will never ever paid. If you borrow $300,000 for your investment house, taking “interest only” loan, 30 years later, the debt will still be $300,000 not a cent less. By using this way, there are some advantages:

After 30 years, the value of $300,000 will be much less because of inflation. In other words inflation becomes their friend.
They have certain asset protection as the asset (investment house or stock or anything else) is mortgaged to the lender, so technically they don’t own the asset, although they have total control the asset. If they don’t own the asset, then somebody else cannot really sue them for that asset, isn’t it ? That’s why the rich loves debt. They control not own.
The interest paid to serve the loan is usually ‘cost of business’, hence, tax deductible.
The extra money that they would pay if they took “principal and interest” are invested to make them even richer.

Conclusion

The main point of this article is NOT about “no need to pay your debt”. The most important point is that when you do business/investment, taking debt (even a large one) is one big alternative. By taking proper insurance, you don’t even have to worry about the debt in case somnething happen to you, just use it to make you more money.

So, as final words:

If you have debt, especially homeloan/mortgage, it’s only logical for you to take insurance. Life insurance and Income Protection insurance to be specific. Read further info here: Protect Your Financial Life: Insure Yourself, Income Protection: Your Salary Cover In Need
Consider taking “interest only” loan when doing business to take advantage of its potential. Have a sweet revenge! But read this beforehand: Be Careful With “Interest Only” Loan: a Potential Problem You Should Know

And as always, please remember, do not take debt to finance your lifestyle or for consumption (read more) . Only take debt for money making activity (business and investment) – read more.

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Protect Your Financial Life: Insure Yourself

Denis Kristanda — Tue, 17 Mar 2009 17:03:53 +0000

When we are busy trying to improve our financial situation and our life in general, one thing that usually people forget is that we are human. As human we got sick, sometimes very sick: do we have enough money to cover the medical cost? Do we have enough money to pay those bill when we are not well? Do we have enough money to finance the recovery? And as human we also will die, sooner or later. And when that’s happen, are we going to be ready ? At least financially ? -ksr_tr-

Insurance Comes To The Rescue

Luckily, the answer of this problem is really simple:buy life insurance. To be exact, a life insurance that also cover disability and trauma cover. We will never know ever, when we are going to be sick or die. Jokingly said, yes, if you die, it’s no longer your problem but it become your love ones’ big burden. But how about if you ‘just’ become disable or need constant (expensive) treatment, not only you will suffer from your medical condition, you will feel the financial suffering as well.

Protect Your Family With Life Insurance

Imagine for one second what will happen if the primary provider of your family suddenly cannot provide that support any more. Not long, your home under mortgage will be seized by the bank as repayment can no longer be made. Then your family will need to rent out. Your surviving partner may need to take multiple jobs to keep the children at the best school chosen before. Maybe, they don’t even have extra money to cover your funeral and have to fall into further debt that they cannot afford to pay. Well, you don’t want all of these happen to them, don’t you?

The cost of the insurance is relatively very small with the benefit. Think like it’s the price for your peace of mind. So, life insurance premium is something that you need to add to your budget.

Do Not Under Insure

Insurance is one of those things that you buy but you wish you don’t need to use it. So, when you do need to use it, the worst that could happen is that you under insure. The sum of your life insurance should at least covers:

All mortgage / homeloan, personal loan and credit card debt (Total the maximum limit, not the current usage).
Living cost for 6 months for your family based on current budget.
Sum 2 item above, then add 20% for administrative cost and the unexpected (funeral cost, hiring lawyer / conveyancer, etc)

For example: say you have $300k mortgage, $30k car loan, $20k credit card limit ==> Total $350k. Your household budget is $2500 per month ==> 6 month=$15k. Then you need to take a life insurance that pays ($350k+15k)x120%=$438k. (You may round this up to $450k)

So, the idea is when something happen to you, your family/ spouse can immediately pay off all mortgage / debt / credit card and continue to live at least 6 months without you without financial burden. The hope is during that 6 months, your family/spouse can adjust whatever needed to continue/improve their lifestyle now that at least they are debt free.

On the other side of the coin, you don’t want to have the pay out become too big as you will need to pay higher for the premium monthly/yearly.

Where You Get One ?

I would suggest to always get the free and friendly service of insurance broker. Not only they can compare various insurance provider to get the cheapest cost/premium, but also they can help to make the claim, should you needed to claim one, faster. Yes, they will get residual commission as long as you still hold the insurance, but just like homeloan, you will pay this commission money regardless. (It’s not cheaper to go direct to the company, the person who serve you will get the commission anyway, and you did get to compare the market)

Another factor to consider is that the insurance company need to be good enough and to stay around in the market when you need it later. This is quite hard to judge so your insurance broker might have better idea. Remember: get at least quote from 2 different insurance brokers

What To Do Next ?

Go find an insurance broker, make appointment to review your situation and get a quote for your insurance above. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this very important item. Remember, if you have a debt, you have to have an insurance.

(Before that, maybe you want to read about another important , but optional, protection for your income: “Income Protection: Your Cover In Need“)