Video: Think Like A Bank

By The Banker | Audio Posts, Investing, Personal Finance, Video
3 Feb 2014
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thinkerWhen I was a ‘debt buyer,’ acquaintances would occasionally ask ‘Oh, could you buy my debt?’

(and I would think, “uh, that’s not how it works.”)

That question told me two things:

1. Most people do not know that all banks and most investors are ‘debt buyers’ one way or another.

2. Most people don’t understand that the monthly interest they pay on credit cards, car loans, and mortgages all form someone else’s “yield” on an investment. Up until about 30 years ago that someone else would have been their bank, but in recent decades their interest yield typically goes to the investor in an asset-backed bond.

I passionately believe that understanding the math of compound interest will help you think like a bank or investor.

In either case, more people should understand – for personal finance reasons – the connection between the interest they pay and the growth of someone else’s money. Because if you reverse the order – if you yourself become the lender or investor of capital – then you get to earn the compound return available from someone else’s interest payments.

Understanding the compound interest formula – which shows the growth of money today into larger amounts of money in the future – helps provide the mathematical insight into this idea of debt interest = yield.

My short video on this subject:

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8 Comments

  1. Bob Mrotek says:

    Sorry Michael but this particular video is gibberish :(

  2. ToddR says:

    A pivotal money-moment for me was when I realized that the bankers’ definition of debit and credit is precisely opposite of everyone else’s definition of debit and credit. Maybe explaining this and “T” accounts at an early age would enlighten a lot of people to how the system works.

  3. Robert Moore says:

    I think it would be better with the same audio rerecorded from a script (without the pauses etc that are a part of normal speech but nor great in a video) over a slideshow.

    Info graphic backgrounds are very trendy, but I imagine they are difficult to do or pricey to outsource. I don’t think they add that much in and of themselves but the visual stimulation helps retain concentration in the face of internet-length attention spans!

    I think it is a great video though and in the classroom I bet it was really awesome.

  4. ToddR says:

    T account is a fundamental diagram used by accountants to track and balance all financial events as either debits or credits

  5. I can’t agree more with you about people’s lack of understanding of compound interest and how powerful it is. A few years back I built a calculator on my own to help people learn the concept and do the math (without having to learn the math which is a major obstacle for many, if not most, people). Feel free to check it out:
    http://www.moneymysteries.ca/InterestCalculator/InterestCalculator/InterestCalculator.html

    I’m now in graduate school working on innovative ways to teach financial skills to young people.

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