One of the rules about money that everything one should know is that there is a ‘cost of money’.
Banks make use of this fact to make money using short-term transactions using your money that they are ‘holding’ for you.
They lend other banks the money short term – sometimes simply a day – charging a low ‘cost of money’ premium on the loan. They also use your money (nowadays, even interest free!) to invest in bonds or other instruments where they leverage your cash to gain returns.
One important note is that they only use the investment returns (their profit) for operational expenses.
To be successful, you must utilize this same mindset. The money you use for your personal operational existence should be used from your return (for work) or on built up reserves (savings) or from an investment return.
Most people think about investing in stocks, trading or CD’s that return 3.5% interest (if you are lucky now-a days).
Do you know one place where you can get a 30 to 70% return on your ‘investment’?
Pay off the principal on any interest bearing loan or revolving credit you have as quickly as possible.
If you are simply paying the minimum or the prescribed payment plan on a car or home, the money you borrowed is costing you upwards of 4 times the value you received over the life of the loan. You are paying the bank/CC company for the ‘privilege’ of using money over time.
So learn self-restraint and delayed gratification techniques.
For instance, rather than get a car loan for $300.00/mo for 3 years, pay yourself $300.00 a month for three years and purchase the car for cash. You’ll get more car because you are using the full potential of the money at that time (less inflation).
Stop being a slave to your credit score. If you don’t borrow, you don’t need a credit score. (Of course, banks and CC companies WANT you to borrow – that’s how they make money)
Resist loans for personal use or business use. Borrow only when you already have the money if you want to build credit and pay it off as quickly as possible.
Now, in business, you’ll hear many people say ‘use other peoples money to grow/profit’.
There are times where you can leverage someone else’s money (borrow/debt) to gain advantage – capital equipment for expansion, for instance, which allows more production/profit.
But my main point is borrowing money has a cost…the lender wants it back with some cost (interest/return) and you must be fully aware and deduct this from your potential profits to make sure you are realizing the best benefit.
So in my opinion, it should be the last resort and well calculated. (In personal matters, it is rare the you can link a borrow to ‘profits’.)
Warren Buffet and Charlie Munger do not borrow from a bank. They have accumulated a reserve of billions in cash that they can use to invent/buy/build a business venture.
As you may have experienced, it is easier to borrow money when you have money. 🙂
So, in my experience (and that of many others), it is better to try and do smaller incremental funding in a business (building sweat equity), keeping the risk small.
Build on that, then see if you need investment for the next incremental step. If you can figure out a way to grow using your own equity and/or re-invested revenue, you will have more control and leverage when you need funding for expansion.
So, Stop robbing your future self (or your future business). Apply the habits of frugality, ‘managing to cash’, self-discipline and delayed gratification and you will see your ability to save, and gain wealth and success in a stable fashion.
Stay On The Rise!