There is a famous story about Coca-Cola and use of money.
As the story goes Coca-Cola would invest many of their hard earned dollars back into their company for new projects.
However, there was no responsibility for these dollars, they treated their money like an investment, and before long they found they weren’t being very efficient.
The solution to this came with a simple change, become the bank. Coca-Cola began to realize that they needed to treat their money like a loan, not like an investment.
This is where economic value added came into play (EVA). By treating their money as if they were the bank, Coca-Cola began loaning the money to itself, and paying themselves back with interest.
Production and growth, as you can imagine, began to incline, and the company became much more efficient.
How Important is Your Dollar to You?
The problem with most American households is the exact same. When you go finance your car, for example, you make sure to make your payment back to the bank plus interest. However, when you pay cash for something, you kick back and consider it money already spent.
However, by utilizing the same ideologies that Coca-Cola learned, you too can become a much more efficient saver and shopper.
Your money should be valued much higher than the bank’s money. You have earned it, you had to use your resources to make it, and it should be treated with respect. This is where the amortization schedule comes into play.
An amortization schedule is basically setting up a payment plan. What we are now doing is setting ourselves up to make payments back to ourselves.
On top of this we want to pay ourselves more interest than we would pay to banks, personally I charge myself around 10-12 percent interest for the money I used.
This becomes a great savings plan, and a way to create wealth by doing what you already do, make purchases. This system is called becoming your own bank or infinite banking.
So how does this system solve almost every problem we face in America today?
- You don’t spend money you haven’t earned.
- You don’t spend money unless you have the capacity to pay it back to yourself.
- You force yourself to save more money and grow your individual wealth.
An Example of Paying Yourself First
Let’s look at the minor payment difference that makes a major impact. Let’s look at a car loan.
$25,000 dollar car, 5 year loan.
To start off, if you paid yourself at 4%, interest over 5 years your payment would be $460.41 a month.
Now, if you paid yourself at 10%, your payment would be $531.18 a month. About a $70 difference, not too much.
However, over the life of the 10% loan you would put $6,870 back into your own wealth. About $4,000 dollars more than the 4% loan.
Now, I want to point this out, at the end of the loan cycle what do you have? Not only the interest in your pocket, but also the principle. So now you have 31,870 back in your pocket.
Now what can you do? Well it’s 5 years later and most likely you are going to need a new car.
Not only does this system put more money in your pocket, but by getting ahead once you will always be ready to purchase your next vehicle.
Let’s say you buy 15 cars over your lifetime. That puts $103,000 dollars into your savings just in interest.
By resolving today to treat your money with more importance, and to save money before you make purchases, you can begin to put yourself on a much more productive path to financial freedom.