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Dr. Kalinda Rose Stevenson
How The Fed Controls The Money Supply
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Have you seen the news reports that the Federal Reserve has “pumped” money into the economy? Have you wondered exactly what that means? How exactly does the Fed “pump” more money into the system?
Controlling the amount of money in the system is one of the most important functions of a government. Money is never simply personal. It is a matter of government policy. The more you understand how governments increase and decrease the amount of money available, the more you will be able to control your personal economy.
In the United States, the central bank is the Fed, or Federal Reserve. Every nation has an equivalent central bank. These banks monitor current economic conditions and respond if the central banks want to heat up or cool down the economy.
Although the news media use this type of language, they don’t explain exactly how the Fed increases or decreases the amount of money. What does the Fed do when the media report that the Fed is “pumping money” into the economy to calm fears of an economic panic? What does it do to “drain money” from the system, to cool it down?
Before we figure out what it means, let’s establish clearly what it does NOT mean. The Fed does not pump money into the system by printing out more currency. Currency is not equivalent to money.
The Fed has several tools it can use to decrease or increase the amount of money in the system.
The first tool the Fed uses is to adjust the reserve requirement of banks. The “reserve” is the portion of customer deposits that the bank must keep. It cannot loan all of its deposits.
If you have ever wondered how banks make money, they make it by loaning out customers deposits to other customers. However, the bank cannot loan out all of its deposits. If you deposit $1,000 in the bank, the bank loans most, but not all, of your $1,000 to other customers.
The Federal Reserve sets the reserve requirements for banks. Typically, the reserve ranges from 3-10% of its deposits. So, with your $1,000 deposit, the bank needs to keep on reserve only $30 with a 3% reserve and $100 with a 10% reserve. The bank is free to loan out whatever is left after the reserve requirement. With a 3% reserve the bank can loan out $970 of your money. With a 10% reserve, the bank can loan out only $900.
If the Fed wants to increase the money supply, it can reduce the reserve rate. If the Fed wants to decrease the amount of money in the system, it increases the reserve requirements. This simple example demonstrates how the process works, and how the Fed pumps money into and drains money out of the system by changing the reserve requirements.
When the bank has to keep 10% of its deposits on reserve, it can loan out only 90% of its deposits. When the bank has to keep only 3% of its deposits on reserve, it can loan out 97% of its deposits to customers. With a lower reserve, more money is available. With a higher reserve, less money is available. .
It is a bit misleading to claim that the Fed “pumps” money into the system. In fact, the Fed allows the banks to “pump” more money into the system, because the Fed has reduced the reserve rate. The lower the rate, the more money the banks can pump into the system. The ability of the Fed to change reserve requirements is one powerful tool Fed uses to control the amount of money in the economy.
By Kalinda Rose Stevenson, Ph.D.
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Make More Money By Selling At A Discount
Even though it seems counterintuitive, you can often make more money by selling at discount now than you can by waiting for a better price. This is based on the concept of the time value of money.
Here’s an example. Last year, a real estate agent listed a property down the street from where I live for $950,000. That price was obviously too high, and the house remained on the market for more than a year.
After a while, the first PRICE REDUCED signed appeared in front of the house. This was the beginning of a long and steady decline.
$950,000, $929,000, $899,000, $869,000, $849,000, $799,000, $780,000, $760,000, $739,000, $725,000
Early in the decline, my husband wrote a letter to the seller asking if the seller would sell the property by carrying a note. In other words, he asked if the seller would owner finance.
The real estate agent strongly advised the seller not to owner finance because it would mean taking a discount on the property.
After more than a year on the market, a SOLD sign finally appeared in front of the house. At this point, the seller’s asking price has gone down from the original $950,000 to $725,000. Even if the buyer agreed to pay $725,000, the difference between the original listing price and the final listing price was a quarter of a million dollars, $225,000 to be exact.
Add to that, the seller paid mortgage, taxes, insurance, and maintenance on a vacant property for more than a year. The question then becomes: How much did the seller lose because the seller wouldn’t discount a note?
The strategy the real estate agent advised is the typical solution for tough times. Keep lowering your price, until someone will buy.
As a matter of strategy, there is a much better solution. If the seller had agreed to owner finance, it is very likely that the house would have sold a year earlier than it did. What is even more ironic is that the real estate agent would have earned a higher commission. The moral of this story is that simply reducing your asking price is not the best solution. You owe it to yourself to find out why owner financing is a better strategy than reducing prices.
by Kalinda Rose Stevenson, PhD
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How Debt Builds Real Estate Wealth
The most successful real estate investors understand the difference between good debt and bad debt.
Most advice to consumers agrees that the ideal situation is to be debt free. Most consumer education treats all debt as bad.
This is not the way that the most creative real estate investors think about debt. They regard debt as an investor’s best friend.
Good debt allows you to take advantage of “other’s people’s money,” known as OPM.
Another word for good debt is “leverage.” In physics, a lever is something that allows you to move something else. If you stick a rod under a rock, and then push down on the lever, you can move the rock.
Levers allow you to move something that you couldn’t move if you tried to pick it up with brute strength.
When you borrow money, you create a type of leverage. You can use someone else’s money as a lever to accomplish what you could not do with your own money. This type of debt is a powerful tool. You are using someone else’s money for your own purposes.
Consider a situation when you don’t have enough of your own money to buy an investment property. When you treat borrowed money as a lever, you can use the borrowed money to buy the property you could not afford with your own money. This is the power of leverage.
You use debt as a tool to allow you to buy something you could not buy on your own. If this is a good investment, the debt will allow you to create profit for yourself. This is an example of good debt. You are using debt to create wealth.
This is not what happens when you take on consumer debt. If you buy an item, such as a plasma TV for $3000, you have taken on bad debt. The TV costs you money. It does not become a means to create profit. This is the difference between good debt and bad debt.
Consumer debt often has no leverage. If the debt is not a tool to create wealth, it is bad debt.
When you borrow the same $3000 to invest in property that leads to profit, debt is a tool to create wealth. This is the definition of good debt.
If you want an example of using debt to create wealth, consider Donald Trump. He carries tremendous debt, which he leverages to build properties that in turn create even more wealth. Some of the richest people on the planet have the greatest amount of debt.
If you want to create wealth, the fastest method is to use borrowed money to do it. You might prefer to talk about using leverage and OPM, but in reality, these are simply another way to refer to good debt.
Kalinda Rose Stevenson, PhD
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How Investors Fund Their Deals
There is always money from a private money investor to invest in real estate if the deal is right.
If you think about money with a consumer mindset, you might assume that the only way to buy investment property is to buy it with your own money and your own credit. This is based on the belief that money is scarce and you have to pay for your investment by yourself.
Where do consumers go for money? They go to banks. And what happens at the bank? If you are a consumer, the bank will require you to provide a vast amount of personal information. You might feel that you have to beg to get the money. And after providing all of the personal information, it is up to the bank to decide if you are worthy to borrow the money.
Once again, it is all about you and your money and whether or not the banks think you are credit worthy. The rule with banks seems to be: If you have money, they will give you more. If you don\’t have money, they are reluctant to loan you any. In the consumer world, you have to deal with banks who decide if you are credit worthy.
What successful investors know that consumers don’t know is that there’s plenty of money available for you to invest. If the deal makes sense, there’s no lack of money. In the investor world, there are people called private money lenders. You don’t ever have to go to a bank to get money to invest in any property.
Let’s say you want to buy an investment property. You’ll need to make a $10,000 down payment to buy it. If you are looking at the investment with a consumer mindset, you might think: “The only way I can buy this property is to pay $10,000 for the down payment. But since I don’t have the $10,000, I can’t buy the property.” This is not the way a successful investor thinks. The investor would think: “I don’t have the $10,000, but I know that someone else does.” The critical difference is that the investor knows that there is money available from other people. So, instead of giving up on the deal, the investor finds a private money lender to provide the $10,000.
This is why a consumer will look at a property and say: “I can’t buy this property because I don’t have the money, and the bank won’t loan me enough money to buy it because I don’t have enough credit to satisfy the bank’s requirements. The investor can stand beside the consumer, look at the same property, and have a different idea.
An investor thinks about the situation differently. The investor knows that there is money available for a good investment. In the same situation, the investor will say: “I don’t have the money or credit to buy this property by myself. I do know that there are plenty of private investors who have the money I need.” The key factor is whether or not the investment is a good investment. It is not simply about you and your money and your credit. If the deal is good enough, you can find the money you need to buy it.
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Taking Time Out Of The Money Equation
One essential step toward creating wealth and living an abundant life is to take time out of the money equation and create No Money Limits.
You have heard it many times. “Time is money.”
We have all been taught to measure money by units of time. The only difference between an employee working for an hourly rate and an employee working on salary is the unit of time.
Whether you are paid by the hour, biweekly, or the year, the amount you get paid depends on the amount of time you work.
The truth is, time is not equal to money. Time is far more valuable than money because time comes to us with an inflexible limit.
No matter who you are, where you live, whatever your capacities and resources, you have the same 24 hours each day as everyone else even though the amount of money available to you can fluctuate. You can earn a higher salary, lose your job, get a raise, take a pay cut. Whatever the rate of income you earn, whether it is measured by the hour, day, week, or year, you have only 24 hours day each day and 365 days each year.
Ever since I read Robert Kiyosaki’s Cash Flow Quadrant, I have been fascinated by the mindset difference between entrepreneurs and employees.
Kiyosaki divides people into the four quadrants of Employee, Self-Employed, Business Owner, and Investor.
Employees and Self-Employed are on the left side of the quadrant, and Business Owners and Investors are on the right side of the quadrant. What is the primary mindset shift which allows someone to move from the Employee/Self-Employed side of the quadrant to the Business Owner/Investor side of the quadrant?
In other words, how does someone begin to think with the mind of an entrepreneur?
The mindset shift is to take time out of the money equation. Whether you own a business or work for a wage or a salary, if you trade time for money, you have not made the fundamental entrepreneurial mindset shift of a Business Owner on the right side of the Cash Flow Quadrant. You have not separated time from money.
Employees and Self-Employed people trade their time for money. No matter how much you earn per hour, per month, or per year, the amount of money you can earn is limited by the fact that time is limited.
As a result, no matter how much you get paid per unit of time, your income will always be limited by time.
When you take time out of the equation, money is potentially unlimited.
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