You Finance Everything You Buy!

How many times in your life have you heard, get out of debt and stay there? For those who are unable to control their finances I would agree wholeheartedly. For all the rest, especially business owners with sufficient cash flow I offer an effective alternative to the very real aspect of lost opportunity cost.

Have you ever considered that whenever you pay cash for something you give up that which you could have earned?  At this point you might say, duh!  But there is a “rest of the story” to this whole equation that you’ve likely never been told that could change the way you look at money and finance forever?

The only thing better that paying cash is to borrow against and asset you own and control. This process can be accomplished via many different assets but the most common would be bank CD’s and a less common but very real, would be a non recourse stock loan.

One of the most common misconceptions in our financial world is that if you pay interest at say 6% and earn at 4% that the 6% paid would be a larger number. The simple answer over any time period is that you pay interest on a declining balance and earn interest on an increasing one! So with that little piece of trivia in mind we may have to rethink the idea of paying cash!

What we are talking about here at the core is the principal of collateralization and it has always been an option with banks, insurance companies, and brokerage firms which are all in the business of aggregating money to lend in various places to create velocity, momentum  and magnification within their respective lending parameters.

Ironically enough the storage facility of choice for most is a qualified plan (IRA, Roth or Traditional) of some sort issued by the very folks who lend money. When you are enticed to put your money in jail via a tax benefit you have permanently forsaken the ability to use your capital as collateral. This may not seem like such a big deal to those who are just chasing yield or return on the money but those of us in business need to think differently about financial instruments and the most effective way to use them. You should be wondering why there is such as rule on borrowing against IRA’s at this point!

If you use a bank CD as collateral (your banker calls them CD secured loans) you must pay tax on the earnings and tie the money up to a certain degree in or to generate a yield sufficient to make this play. On the other hand you may do all of this activity inside plain vanilla mutual whole life contracts structured sufficiently toward high cash value. It is accomplished on a tax advantaged basis and in the great State of Washington the asset can even be judgment proof.  The icing on the cake is that the spread (interest paid vs. earned) is pre negotiated with most companies.

Cost of capital and efficiency are very real issues and should be measured in everyone’s personal economy but so often overlooked given what advisors have been taught to teach the public. The financial world has been rocked due to greed,  perceived knowledge and lack of accountability. It is time for true economic literacy and not what someone told us was true! A revelation is to make known truths that were always there and we must seek them every day!

All the best!