Rose Taksier-Jones, CPA, has helped many clients improve their personal and business finances during her 45-year tenure at Kaufman, Rossin & Co.
Wouldn’t it be great to not have to rely on fluctuating interest rates, prodding inquiries, and strangers looking into your personal financial position? Not to mention all the papers and documents that need to be gathered for review and signing, just to get a loan to pay back someone with interest.There is a way to become more self-reliant and have more money in the process. You can set-up a self-financing program, in which you build your savings to finance major purchases, borrow the money from yourself, and, here’s the key… pay yourself back with interest.
First, let us look at the advantages of this plan:
- No one can foreclose and take away your purchase if you are late with one of your payments, or even stopped for a few months.
- No one can hound you for payments.
- No one can charge you a fee for late payments, even for one day.
- No one can lower your credit rating.
There has to be a down side, right? It sounds too perfect, you might think. There is only one important caveat: it takes discipline to make the payments, whether timely or late.
Build Savings and Become Your Own Banker
To begin to be self-reliant financially, you will need a savings account. If you have one already, then you just need to build it up. One easy way to grow your savings is to skim the top of your paycheck by a certain percentage (e.g. 10%) or a flat amount (e.g. $25) every pay day. This deduction must go to your savings as soon as you get your check because if you don’t see it, you won’t spend it. Most payroll services today will allow you to split direct deposits between your checking and savings accounts.
Additionally, any increases, bonuses and raises in pay should go to that savings account – if not in total than at least 25%. Remember that you have been living on less for a while, so you should not miss the increase.
The only funding stipulation for this self-financing plan is that the payments must come from your earnings and not from another savings account or gifts. For example, if you receive a cash gift for your birthday, you might choose to add it to your savings, however, this does not affect the fact that all payments must be made from your employment efforts only. If you lose your job, then the self-financing payment agreement is null and void, until you are employed again. Of course, if you are self-employed, payments from your revenue are acceptable.
Regular deposits into your savings account should not stop because you are paying back a loan to yourself. Don’t forget that you are now a banker, a financier. Fresh money is always needed to help support future, perhaps larger, loans.
Self-Financing Major Purchases
Self-financing programs can be used for many things: vacations, large household furnishings, cars, computers, college, etc.
As an accountant, I encounter many people who could benefit from a program like this. For example, one of my clients was about to borrow money, for her son’s college education, from a financial institution. The calculated interest costs amounted to approximately $11,000. She was in bondage to the lender.
She had money in a brokerage account, and I asked her simply if she could make $11,000 by leaving it in the brokerage account; she didn’t think so. I suggested she pay for his schooling and make payments back to her brokerage account with the same payment schedule she would make to the financial institution, thereby, putting the entire principal back and adding $11,000 to the account in interest payments. When her son finishes college and becomes a doctor, her principal would be back and she would be better off by the interest she would have paid someone else.
I have purchased two cars and am working on my third car, each with a 5-year self-financing plan. I have been able to grow my savings by charging myself 10% interest on those loans, and so I have been able to upgrade my cars each time. In three more months, I will have paid back my full-house generator, but because times are not as good as they used to be, I am only charging myself 5.5%. With savings accounts offering less than 1% interest and the economy still trying to recover, where could I earn a better return on my money?
The three D’s for success:
- Desire – to be debt free and still be able to purchase big-ticket items.
- Determination – to see your goal of freedom of debt come to fruition.
- Discipline – to stick with the payment schedule you have designed to meet your goal.
Staying on Track with Payments
The secret to keeping on track with your payments is to go online and run an amortization schedule for each purchase. Marking off each payment with the corresponding check number will help you monitor your progress. The best part of using an amortization schedule is being able to see the amount of interest you will be earning and not paying to someone else.
There are many options for creating an amortization schedule. I use TimeValue software (www.TimeValue.com), but there are some good tools available for free online, including http://www.amortization-calc.com and www.myarmortizationchart.com.
Fortunately, you are the one making the loan to yourself, and therefore you will be able to design the terms for payments that you are most likely to keep. Bi-monthly payments, monthly payments, quarterly payments, you name it. Payments with 10%, 5%, 8% interest – take your pick. However, stick with a maximum 3 to 5 year payback. Longer loans may be harder to keep up.
Once you have seen self-financing work for you, starting with relatively small purchases, such as a $500 area rug for your living room, you’ll have more confidence to build your way up to larger purchases. Soon you’ll be on your way to a debt-free life and a brighter financial future.
Rose Taksier-Jones, CPA, is a senior accounting professional in Kaufman, Rossin’s Miami office. Kaufman, Rossin & Co. is one of the top CPA firms in the country.