Borrowing From Yourself Not The Same As Paying Cash.

Question: A few weeks ago you wrote about borrowing your own money to make major purchases. I already pay cash for most everything I buy. Isn't this the same thing?

Answer: No.

This reminds me of two guys freezing their earlobes off in Alaska one winter. One guy says, "I'm heading to Phoenix as soon I can!"

"Me, too," the second one says, "Florida is lovely this time of year."

Phoenix and Florida are both warmer than Alaska in the winter, but they are not the same place.

In the same way, paying cash and systematically borrowing from yourself are both a long way from being enslaved to consumer debt, but they are not the same thing.

When it comes to the purchase of the big stuff in life, you finance everything you buy - you either pay interest to someone else or you give up interest when you use your own money and pay cash,.

Major corporations understand this. Most major manufacturers of durable goods have their own financing units. General Motors has GMAC; General Electric has GE Capital; Caterpillar has Cat Finance and Boeing has Boeing Capital - just to name a few.

And who is the newest bank wanna-be? Wal-Mart.

To understand the difference between (a) borrowing from a bank to buy, (b) using cash to buy and (c) borrowing from yourself to buy, let's consider an example.

Joe decides to buy a fancy new car - $35,000 worth. He does what most of us do - he simply finds out from the dealership what the monthly payments are. At 8 percent interest for 60 months, his car payments are $710 a month. For 60 months, Joe dutifully makes his payments. At the end of the time period, Joe has spent $42,600 in car payments, has a five year old car and zero money.

Fred is a bit smarter. Fred has been listening to a financial guru on the radio who calls you names if you do anything else but pay cash for things. So he tells his wife that they're going to cut out all vacations, any eating out and any Lotto tickets for a while so they can save up a bunch of money quick. After several months, they scrap together $35,000 and buy the same car as Joe bought. Now Fred has a wife that is mad at him, but at least he didn't have to pay all the interest that Joe paid. The difference between what the two men had to pay for their cars was $7,600 - the amount of interest Joe paid over the 60 months. So Fred is feeling pretty good about still having $7,600 in his pocket.

Wilma, on the other hand, does not mind the idea of a car note. Her parents always had car notes and everyone she knows has car notes. She has heard all the advice about paying cash for things, but she doesn't like Fred's approach of going into a tightwad frenzy just to save up enough money to buy the car.

So Wilma thought ahead and made sure that over time, she kept a good bit of her personal savings in places where she could get to it. She wanted access to her own money.

When it came time to buy her new car, she called a friend who worked at a bank and asked what car loan interest rates were. She was told the same thing as Joe - 8 percent.

Wilma realized that if she wanted to get the same deal the bank was getting, she would have to do more than simply use her own money (and pay cash). She would have to set up a system to pay herself back at the going rate of interest - 8 percent.

Using this system, she had the same $710 per month payment stream as Joe. Only her payments went into her account. Using her system to recapture her own cash flow, at the end of 60 months, Wilma not only had the $35,000 back in her account, she also had the interest she would have otherwise (a) paid to the bank or (b) earned herself.

The secret to the system is the system - keep your money accessible, borrow from yourself and repay yourself at market rates of interest.

If you'll work that system, it will work for you.