Okay, Radio Gaga has nothing to do with Lady Gaga. Actually, Radio GaGa Radio Goo Goo are lyrics from an old Queen song.  However, the title of this article has to do with the gaga and goo goo of advertising.

While driving, I was listening to a commercial about mortgages. The ad started out saying something like this. “Mortgages should be illegal.”

Then the ad went on to mention that on an average of loan of $200,000 over thirty years, the borrower would send in over $400,000 to the bank including interest. That’s almost half a million dollars!

Obviously sensationalizing half a million dollars going to the bank makes a borrower want to pursue the product the commercial is pitching – a get out of debt and build wealth scheme.

Without debating whether or not wealth can be built using debt is another topic for discussion, the focus here is to cut through the hype of the commercial.

To begin, on a $200,000 mortgage for thirty years at 6% interest, the payment is $1,199 – call it $1,200 for simplicity purposes. Over thirty years, or 360 payments at $1,200 per month, the total outlay by the borrower is $432,000. And yes, this money goes to the bank. However…

$200,000 of the $432,000 goes to principal reduction; or to put the example in another context, the borrower is reimbursing the bank for paying for the property in the first place as opposed to the individual paying the seller.

If cash had been paid for the house, the amount $200,000 is paid by the homeowner anyway. Therefore, $200,000 is a wash for buying the house. This money is spent regardless of getting a loan or paying cash. Therefore, the remainder $232,000 is interest.

Now is paying $232,000 a lot of interest? Sure it is.

Is it wise to pay such an enormous amount of interest to the bank? Maybe.

What will determine if paying interest is wise depends on a couple of questions.

First, is saving money important or making money important?

If saving money is important, paying off a mortgage quickly reduces the amount of interest owed.

Second, if making money is important, then consider “what are you doing with your money?”

If you are making money and creating more income and wealth, sending money in those asset and income directions may be more important than saving the interest. After all, businesses borrow money to make money and without OPM (other people’s money), generating income may not be possible.

If the gains are greater than the amount of money paid, paying large amounts of interest is a wise choice.

Just as paying interest is a choice, individuals have the choice whether or not to believe the hype pitched in advertising, but a little financial education require one to think just a little…and that leads us to my next topic…

Save more, think less.

I was in a meeting listening to a person speak about his local financial counseling service. His idea was that they would provide financial education. In addition to education, the company’s goal is to potentially fund a small grant, up to a few thousand dollars, when and if their organization is able to find organizations or partners to assist financially.

In addition to financial education, currently the program provides free tax return services.

As I sat there listening to his sales pitch on what their company can do and what we could do for them, my mind wondered on several topics.

First, who funds the “free” tax returns? If their organization is made up of private donors, no problem; however, if taxpayer money provides services, local business suffers.

Local bookkeeping and accounting services can’t compete against free services. As far as a “double whammy”, business pay taxes on their income and assets to fund these “free services”. In summary, businesses pay taxes which go towards providing free services and then cuts out their own business.

Next, why do people need financial counseling? For one thing, our educational system must not be working or working properly. People can go to school for free. Once again, free is not really free for everyone. Now there are free counseling services for people who did not obtain a decent free education. Hmmm.

Finally, what really got me was the presenter’s attitude and lack of knowledge toward financial education. His attitude was an air of greatness. However, his information was common.

What I mean by common is the subject was on net worth, which is very important, but the manner in which it was described was lacking in details.

The idea behind building net worth, in his mind, was to get out of debt. I don’t have a problem with getting out of debt, but being debt free is not necessarily increasing net worth. I’ll explain in just a minute, but first the typical advice this service was to offer was “save” money, not “make” money, which is a different attitude.

Every radio personality I hear talks about saving money, so why is this free service any better? It’s not.

Now, when I mention net worth, if I have $10,000 and owe nothing, my net worth is $10,000. However, if I have $10,000 and borrow $10,000 more, I now have $20,000 with $10,000 in liabilities thus creating the same net worth. Borrowing the $10,000 may be put to use to create more income which can be greater than the amount of interest paid.

I didn’t mention this new program wanted to focus more on net worth than income, did I? This, to me is another huge mistake in financial education. How?

With income, I can create net worth. With net worth, I may not be able to create income.

Without income or enough income, my net worth will eventually decline. Therefore, as important as net worth is, using net worth to create income or simply increasing income is much more important.

Bills will still come each month whether people have a loan or are debt free. However, little income may make people borrow, such as on credit cards, to pay bills; which starts the whole process of financial woes all over again.

The bottom line, since we are talking about the bottom line regarding net worth, is to determine if financial education teaches us something we don’t already know, or if what we are told is simply the same rehashed stuff we commonly hear.

The odds are always with the house, or the bank. I was playing poker with my son. We are simply playing a game of cards, but it is fun to win. (And yes he won too.) Someone wins and someone loses, that just the fact of life. It doesn’t matter if it is checkers, cards, football, baseball or whatever. However, we have the choice to play or not to play games.

But in the game of life, we don’t always have choices when it comes to playing with our money.

No, I’m not talking about poker or any other game. Rather, I’m talking about taxes, inflation, loans, insurance or the stock market. These are “games” that we play everyday. If you don’t learn the rules of the games, the house has the odds.

Have you ever noticed the size of the financial institutions or government monetary figures? Sure you have.

$900 billion or a trillion, such as in the bailout figures.

These institutions use debt and loans all of the time even if they do not use the terms debt or loans. For example, a certificate of deposit at a bank is really a loan from us to the bank. The bank pays CD holders interest and uses the money to turn around and make more money.

The thing about it is that it is not necessarily the debt that causes problems as the debt free pundits proclaim, but rather the actions the action people take when buying items and spending money regarding the financial decisions made. What I mean is did money get spent on vacations, jewelry, boats, or whatever? I $100 or $200 here and there starts to add up. Or, is money invested at random just because some said buy this stock or mutual fund rather than research the markets, trends, etc. Another example might be to buy and hold instead of selling at the appropriate times.

In reality, who has more money, the institutions that use debt properly or the people who tell tell you to get out of debt?

Some banks will go broke, as we have seen, and some will win big. Some win. Some lose. But these players know the game and are playing against other experts.

Most homeowners, and I have made mistakes in the past too (as a result, I have decided to delve into the real estate and banking business rather than just take someone’s word for it), are really not an expert in real estate.  Neither are many realtors or bankers that I’ve come across for that matter either.  To give you an idea of what I mean, is a house really an investment? The property can be, but in most cases it’s not – except to the realtor (or person who loves real estate) giving the sales pitch, or the people who write the tax laws, such as capital gains. More on this in Barking With The Big Dogs. You can also get an idea of housing from my post dealing with the property being a hedge against inflation by reading here.

Therefore, keep your poker face on when it comes to looking for a house.

Even people who preach getting out of debt don’t always tell the whole story. Maybe because they don’t want to tell you or because they don’t know the game itself.

Similar to playing poker, if you are playing poker, you don’t show your hand. You bluff and make it look good if your hand is not very good.

When listening to a show on getting out of debt, or all debt is bad, how much would you put in their “pot” just to sit at the table and learn what you already know… such as don’t spend more than you make.  I would hate to have a 15 year mortgage and lose a job just simply trying to avoid debt.  That’s pretty risky.  Are you willing to bet the house?

Losing income is much more damaging than having debt.  But if you do lose income by all means you do want to get out of debt as fast as possible provided you do not give up additional income in the process, i.e. liquidating income producing assets.  Rather, if you are not making money, then it’s time to walk away from the table.

Before you sit at the table in a bank or at a real estate office (or wherever), you had better learn the rules of the game so you can level the playing field.  Otherwise, they may just clean house.

  Copyright secured by Digiprove © 2010 Mark

The following video, by Robert Kiyosaki and his colleagues at RichDad, is very good and I thought it worth sharing.  I’m finishing a book on banking, markets, real estate, etc. that is not commonly taught.  Just like my book, I’ll show this video to my kids.

In defense of banks to begin the conversation, credit cards are unsecured loans and much more risky for banks than secured loans, such as auto or homes. The riskier the loan the higher the rate and this makes since. Wouldn’t you want more for your money knowing the potential for default is greater if you were loaning money? Credit cards are a convenience for consumers too. Okay, I’ll stop there…

In February, the new credit card laws go into effect. Great, the laws were to protect the consumers, right? After all, interest rates are not supposed to change based on activities such as other cards, etc.

Many rates will still be tied to the Prime rate, which is not really that big of a deal. Prime rates moves close to other indices, such as LIBOR for example, and really do not adjust a big amount in a year’s time. A couple of years may have to pass for the rates to move just a few points.

Right now, rates are very low and realistically can only go up.

Card companies are changing rates to adjustable rates right before the law changes prohibiting them from various activities (except for default of course).

The real caper in the credit card interest rate is the margin. The margin is the amount added to the index, Prime in this case; and the two (index plus margin) together make up the full interest rate. Margins may be 20+%. For example, if prime is at 3.25% and the margin is 24%, the interest rate is 27.25%.

When does price gouging come in to play?

Since taxpayers pay for stimulus packages (without a choice in all of the pork added to the bills), make the next package pay off individual’s credit cards and do something that really benefits people right away.