ichthyoid

There’s a famous story about a fisherman and a businessman, wherein the businessman asks the fisherman what he does every day. The fisherman tells him that he catches fish, goes home, eats, and enjoys his life with his family. The businessman tells him that, instead, he should start a business with what he does. In a back and forth dialogue, the businessman reveals the ins and outs of starting a business, gaining customers, market share, and selling his business after investing long years and hard work into it. After this, the fisherman would finally have the time and money to retire, catch fish, go home, eat and enjoy life with his family. The moral meant by the story is that chasing money is a distraction from the more important and valuable things in life.

As nice as it sounds, I’ve found that the problem in this story is the belief that earning a substantial income is in direct conflict with living a full, virtuous life. As I’ve found, doing both is not only quite possible, but also achievable for almost everyone, especially in this day and age. Earning a good income doesn’t have to come at the expense of doing what I enjoy in life. With a little financial education, anyone can do both. And for me, it starts by becoming my own banker.

In this series, we’ve now walked through the entire process of becoming our own personal banker. In summary, we primarily store our value through the purchase of assets such as gold, real estate, participating whole life insurance, or even cryptocurrency. The reason we use these kinds of assets is because they have historically outpaced inflation and can also be collateralized. We use the money we gain from collateralization to put into a P2P lending service, invest it in the market, or purchase more assets like real estate.

When we do this, we need to make sure the income flow from these investments outpaces the interest rate and the principle we need to return for our collateralized assets. This way, we not only pay back our own assets’ worth, but also earn an income. After the asset is repaid, we can then collateralize it again to do the same thing. Thus, we have a system that earns us perpetually increasing income.

In this post, I’m going to give two example scenarios of what this can look like. These scenarios are completely hypothetical, and meant to be a bit more fun, but hopefully will give some inspiration or idea of how to practically apply all that we’ve been talking about throughout this series.

Example 1: Using Real Estate

For our first example, I’m going to use real estate, and see how it can augment my lifestyle as a music teacher. As a musician, one of my passions is to take what I’ve learned and share it with others through teaching. While online learning is becoming more and more popular, it still can’t replace the immediacy of in-person one-on-one lessons for a serious student. And so, as a music teacher, I am often contracted to go teach students privately in their own homes.

However, to save on gas, I’d rather the students drive to a studio I own to get lessons. The studio, in this case, represents the “lending” or “investing” that I would be doing for our banking function (albeit lending to myself). In order to get a commercial space, I need to factor in the costs of rent, utilities, and other things to do with maintaining a building. Furthermore, I realize that once I have a space, I can also rent out that space to other music teachers and perhaps anyone else that would want to use it when I’m not.

Using a home that I own, I refinance it to get some extra cash in order to jumpstart my business. Now, I owe principle and interest on my home, but I can finance that with the income I’m initially getting from my private lessons. During the downtime that I used to have driving to different students’ houses, I can now use that to market my studio online, and look for and hire music teachers in my local area. These teachers are privately contracted, and thus bring in additional income for me, which augments my ability to pay off my refinance as well as the monthly payments for the studio space.

As my income grows from my private lessons, I can actually now reduce my teaching time to only teach the students I want to during the times I want to. Other students can be more or less handed off to other teachers I’ve hired. When I pay off my refinance, I can now refinance again (if I wish) in order to either make the business better or start another studio somewhere else. Or I can just take the extra income and relax.

And so, as we can see, in this scenario, not only have we maintained our lifestyle with our asset, but we have actually produced a better life that we can enjoy by becoming our own bank.

Example 2: Using Participating Whole Life Insurance

Let’s go even simpler than my previous example. In fact, we can look at the hypothetical example of the fisherman and see how a Participating Whole Life Insurance policy can augment his current lifestyle.

Instead of saving his income in a measly savings account, our fisherman friend decides to move his savings into a PWLI, and put any future monthly savings into that policy as well. In addition to his growing cash value in the policy through premiums, he has interest and dividends on the account. After a few years, he decides to collateralize the current cash value of the policy, and place the loaned money into a P2P lending account, which he is using to get a decent return. With a little bit of careful management, he can make sure that the defaults on his loans are minuscule in comparison to those that pay back, which means he can take the profits to pay his policy back and earn a little extra income on the side.

Why not just save cash and put it in the lending service directly? In a PWLI policy, collateralizing means that we retain the compounding interest on the cash value of the policy. This means that, while we may be loaning the money at 6%, our policy is still gaining value at 4-5% (it’s not difficult to find a policy that grows at this rate). And so, the net interest we owe is really around 2%. Now, when we lend out our money in a P2P service, we make sure that the money we’re lending is at least more than 4% (very easy to do), and we have overall managed to make a profit! Furthermore, PWLI’s are offered by mutual companies that usually pay out a dividend based on the company’s profits, which can further mitigate what you owe on the policy, depending on what you want to do with it.

And so, it is easy to see that, even without starting a business or looking at complicated earnings reports to determine our stock market investing, we can multiply the money we have through careful management of a PWLI policy and P2P lending. All this without much negative change in the lifestyle of our fisherman friend.

And these are just two of dozens of scenarios that I could come up with for using our assets like a banker.

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