What is the ‘lost-opportunity-cost’ of paying with CASH?

Let’s use a car purchase as an example of

the Lost Opportunity Cost of spending cash.

Let’s begin with assuming you have $20,000 saved up in a savings account and you want to buy a car. You do not want to pay the bank all that interest and you have been told that CASH is KING so you always try to pay for everything you purchase with cash. What happens as soon as you remove that $20,000 from your savings account? It no longer earns you any interest right? So over say 40 years, as you can see below, you could be loosing $96,020.41 of interest gain, less taxes of course. That is the Lost Opportunity Cost of paying with Cash.

If you instead leave that $20,000 in the savings account earning 4% and borrow from your local lender the $20,000 at 6% over 5 years, the numbers will look like the illustration below depicts. You will pay to the lender bank $3,199.35 of interest charges as well as all the borrowed principal back.

But just out of curiosity, how much would you have earned if you only kept the $20,000 in your savings account, earning 4%, over the same 5 year time period that you also borrowed the $20,000 to purchase the car? See the illustration below and notice you actually earned more interest in the same time frame, with an interest rate that is 2% less than you paid.

The difference between the earned $4,333.06 and the paid $3,199.35 = a profit of $1,133.71. So by paying $20,000 cash for the car and saving the $3,199.35 of interest charges, the lost opportunity of earning $4,333.06 of interest means there was a lost opportunity of earning a profit of $1,133.71 and owning the car as well. And that is while earning 2% less than the 6% charged for the financing of that $20,000 while the $20,000 was earning 4% compound interest. If, after the 5 years, you now take that earnings of $1,133.71 and keep it in a savings account earning 6% for 40 years, you will end up with $12,276.34. So that is the lost opportunity cost of spending the cash instead of financing the car, if you only take into consideration the difference in the interest paid and interest earned for the one car purchase, over 5 years. The actual loss over a lifetime though is much greater, $96,000 over 40 years. Either way, you end up ahead if you finance for a little higher percentage while keeping your principal in a savings account earning a little less of a percentage.

There are always three players in the banking game though. The Saver. The Borrower and The Banker.

All are equally important and necessary.

Most people only ever experience two of these banking players.

Can you imagine being the Saver, the Borrower AND the Bank Owner of your own Private Banking System?

What would that look like if?

YOU are the SAVER of the $20,000 earning $4,333.06.

YOU are the BORROWER of the $20,000 paying $3,199.35, to yourself.

AND, YOU are the BANK OWNER that lends the borrower, YOU, the $20,000 and earns $3,199.35 interest, but also pays the saver, YOU, $4,333.06.

There is only one financial vehicle in this country that is designed so you can be all three players in your own private banking system. It is a specifically designed dividend paying, whole life insurance policy, with a mutual company.

 

Let’s take a look at the illustration below depicting a loan from your own private banking system. Notice you buy death benefit straight away with the money you are capitalizing your new banking business with. However, the cost of the insurance decreases over time and costs nothing within a short period of time. One still has to pay premium, however the cash value that premium generates each annual payment equals more than the premium at the third year.

Also, taxes have to be taken into consideration. Any interest earnings on principal in an ordinary savings account will be taxed. The growth within your own banking system can be accessed tax free though, if withdrawn correctly. This tax advantage is a huge wealth accumulation benefit.

First of all you must capitalize your bank first, as is depicted in this illustration. You can actually start borrowing within 2 weeks but in this illustration it shows you capitalized your bank for seven years before taking a loan also in the seventh year.

Notice in the fifth year of the loan repayment schedule you cannot fit the entire loan repayment of $4,640 to make up the total of $23,199.36, back into your bank.

There is an overage of $1,121.00, the difference between $4,640 – $3519 = $1,121. That is the difference between the interest that the company (you partly own) holding your policy bank charged, and what your regular lender bank would have charged. So you came out ahead by $1,121.00 by being a part owner in your private banking system with other like minded individuals.

By being a borrower from your own banking system and by being a saver in your same banking system as well, you have also added the bonus of a death benefit to the entire scenario. Notice that even though you borrowed $20,000 you still earned guaranteed growth and non-guaranteed dividends each year. That’s because when you borrow from a mutual insurance company that you own a dividend paying whole life insurance policy with, you actually borrow from the company’s general fund and your death benefit is used as collateral. This means that the money you borrowed is still growing. The growth is reduced a little to make the shared profits fair to all, but it is still growing.

You actually have the opportunity to fill out a short new underwriting form to be able to include the extra $1,211 as additional policy premium if you wish. This would allow you to purchase more Paid-Up-Additional insurance which in turn would generate more cash value to build your capital for more borrowing power. Doing this also increases your guaranteed and non-guaranteed dividend returns. Or you can use it to help pay for next years premium.

 

If you could find a place to keep all your money and know that in the future you would be able to get every penny of it and it’s growth back, tax free, would you object to putting your money into such a place?

Your own privatized banking system gives you the ability to do just that.

Call me today and ask me any questions you may have about owning a your own private banking system where you become your own banker. Jennifer Hansen 845-649-7487. Jennifer@DebtDiagnosis. com

 

   
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March 28, 2011 · Jennifer · No Comments
Tags: ,  · Posted in: Lost Opportunity Cost of Spending Cash

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