For a while now I've been working toward a particular want: a 50-inch plasma screen HDTV. As I've been working and saving, they've been getting cheaper and cheaper. This helps to close the gap quicker, but I now have a way to jump the last bit of distance. Very soon, I'll have a wall full of glorious phosphor glow.I've been writing about my Forex stuff and how I use it to pursue a very large amount of passive income relative to the amount of money I deposit as principal in my account. I've been talking about how I'm getting it, but now I'm going to talk about what I'll be doing with it.
Forex interest can be quite lucrative, so much so that combined with careful use of credit cards, it is possible to purchase items with less cash than their price, keep the cash you've saved up, and do it without having to work to pay down the credit card balance. You can have what you want sooner and let your Forex account pay it off for you. The reason this can be done has to do with the way credit cards and Forex accounts work: revolving credit and interest generated on leveraged balances.
Like any loan, there is a specific amount one must pay on a credit card balance. However, unlike most types of loans, the amount that must be paid on a credit card balance each month is a percentage of the balance, usually 2%, and the loan does not have a specified "lifetime" - it simply goes on until the balance is zero. In other words, for every $1,000 of carried balance on a credit card, the minimum payment required will be $20. As you pay own the balance, your minimum required payment goes down, too.
The HDTV I have my eye on, plus a mounting bracket to hang it on the wall in my living room will cost roughly $1,080 total. Put on a typical credit card, the initial payment I would be required to make would be $21.60, or $22 since these payments generally get rounded up.
Now, if I were to just run right out and charge this, I would then end up with the minimum $22 monthly obligation landing on my wallet. This would be paid out of my wages from work, which I'd like to avoid. Money I earn from paid work is what I've received in trade for my time. Time is something that cannot be traded back to me. Once it is gone, it's gone. Therefore, I want to avoid spending money I worked to get and instead make it work for me so I can eventually trade less and less time for money. I want this money to become assets instead, which a TV really is not - assets generate wealth, other things only consume it. 50 inches worth of plasma driven HDTV will be fun, no doubt, but it is not an asset. Add to that equation the interest charged on a credit card balance and it becomes an even less attractive idea.
For a similar reason, I do not want to simply save up the money for the HDTV and spend it buying one. This runs into the same problem: the money I traded for the time that I cannot back is then gone, too. Sure, I'd then have the HDTV and no debt to pay off, but it is still not an asset and - worse - it can only go down in value over time!
This is where Forex comes in.
A few days ago I blogged about the steps for figuring out the amount of cash you would need to deposit in a Forex account to generate a specific amount of interest each month. Taking the monthly minimum payment amount for the HDTV and mounting bracket charged to my credit card from above, $22 dollars, I can figure out how much I would need on deposit in Forex to generate this amount of interest each month:$264 annual interest / .1275 (current USD/TRY short interest) = $2070.59 leveraged trade value
$2070.59 leveraged trade value / 50 (leverage amount) = $41.41 margin call amount
$41.41 margin call amount * 2 = $82.82 margin used amount
$82.82 margin used = 10% of my deposit balance, so $82.82 * 10 = $828.20
Therefore, to get the $22 each month using USD/TRY held short at its current yield of 12.75%, I would need $828.20 on deposit.
Recall that the purchase price of the HDTV and mounting bracket is $1,080. The sum needed in the Forex account to cover the minimum payment for this amount on a credit card is 77% of the total purchase price, or 23% less cash than required to buy the items outright! This means it can be had sooner since it obviously would take less time to save up roughly $828 than to save up $1,080.
Of course, you have charged this to a credit card now, but you are also receiving sufficient interest to zero out the monthly minimum payment. However, as the card balance drops, so does the payment! Assuming that your Forex interest remains level (or if it goes up), then each month that goes by results in having more interest from the Forex deposit than you are required to pay to the credit card. If you maintain your payments at the level of the initial payment, it will be paid down even faster. Meanwhile, you still have the money you deposited to the account, money that will still be there and earning interest even after the card balance is paid off.
Some would object that you're still spending money you've earned, albeit by passive means, and that it ends up costing more for a given item in total due to the credit card interest. Both of these points are correct. However, it does overlook the real point of doing things this way: the payments will one day cease, but the money you worked for in the first place is still yours, and it can continue to work for you!
The generation that lived through the Great Depression in the U.S. (and no doubt elsewhere in the world, too) coined a saying based on that experience: "spend the interest, not the principal." One must spend at least something at some point, it is practically impossible not to. And then one will probably have to spend again later on. Obviously, it is better to be able to do so both times with money from a source that replenishes itself.
Yes, it is your money that you pay out, and I agree that what I've described here will make the items I buy more expensive over-all, but since the payments come from a passive, residual source, psychologically I find it hard to worry about that (just look at the interest you pay to the credit card company as a fee for their services and it's less onerous). And isn't that the point, to make oneself more comfortable, content, and happy? (Aristotle thought so, that happiness is the telos of human existence, and I agree with his findings - he was flat out wrong about monetary interest, however).
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