TEST BANK For Corporate Finance, 13th Edition By Stephen Ross, Randolph Weste...
How to Become Your Own Banker
1. Recover The Payments, Interest &
Finance Charges You Otherwise Pay
To Banks & Finance Companies!
2. Recapture the interest and profits you now pay to
banks and finance companies!
Finance a car, house, credit card debt or college
education—yourself!
Wake up at the beginning of each and every year
with more wealth than you had the year
before!
Create a tax-free stream of income for life!
Eliminate banks and finance companies from your
life and gain control over your money!
Win the financial freedom game!
You can benefit from this strategy even if you
typically pay cash for major purchases!
3. Here's How To Recapture Those Dollars By
Becoming Your Own Banker, Plus...
Get triple compounded interest on the money you recapture
Use it to grow wealth without risk
Eliminate banks & finance companies from your life
Gain control of your money
Create a tax-free income stream for your retirement
4. Unfortunately, there's no such thing as a "magic
bullet"—I can't show you how to finance your own car
starting tomorrow, because...
If you want to become your own banker, there's going
to be a "start-up" or "capitalization" phase, just as there
is when you start up any new business
However, you can become your own banker for your
car in just a few years...and once you do, you'll never
have to throw money away leasing or financing a car
for the rest of your life!
5. The 3 Wrong Ways and 1 Right Way to Purchase A
$25,000 Car...
To keep this illustration as simple as possible and to compare apples to apples,
we are making these assumptions:
1. We are not factoring in any down-payment
2. We are not factoring in any trade-in value a car may have
3. We are not factoring in inflation
4. We are assuming you will buy a $25,000 car every four years,
from age 40 until you turn 80
5. We assume a conservative historical interest rate on your car loan or lease of 7.5%.
(Do you remember it wasn't long ago that car loan interest rates were higher?
In 1997, it was 7.99%, in 1994, it was 8.5%1, in 1991, it was 11%2)
6. We calculated the "lost opportunity cost" (LOC)—which is what you would have
earned by investing the interest you gave to the finance company, by assuming you could
get a 5% return (long-term) on that money, had you put it into a savings account instead
7. You pay taxes on the income you earn in a taxable savings account at a rate equal
to your combined Federal and State income tax brackets
1 USA Today
2 Kiplinger's Personal Finance Magazine
6. Your monthly payment is $416.00 of which 50000
$57.56 is interest (current interest rate on leasing
is 7.50%) You do this for 40 years, leasing a new 0
car every 4 years.
Total Cash Outlay = (-$199,680)
-50000
LOC [Lost Opportunity Cost]= (-$60,208)
(i.e. the lost earnings on the interest you paid Lost
Opp.
to the Finance Co. or Bank) -100000
Cost
Your total cost = (-$259,888)
-150000
Total
Other Drawbacks of Leasing: Cash
Outlay
You have no equity and you get nothing back -200000
at the end of each lease!
You typically pay a large down payment. -250000
Lease company may make you pay extra for
depreciation, wear and tear, or high mileage. -300000
7. Your monthly payment is $604, of which $84 is interest—you do
this for 40 years (financing a new car every 4 years)
Total Cash Outlay = (-$289,920)
LOC = (-$87,489)
Your total cost = (-$377,409)
You get nothing back from the bank or finance company at the end of the
loan!
100000
0
Lost Opp.
Cost
-100000
Total
-200000 Cash
Outlay
-300000
-400000
8. You take $25,000 out of your savings account 100000
every 4 years to pay cash for your car & you do this 0
for 40 years (10 cars total). -100000
Remember—you finance everything you buy—
you either pay interest to a bank or finance company -200000 Lost
OR you give up the interest you could have earned on -300000
Opp.
Cost
your money had you invested it, instead of paying
-400000
cash for a depreciating asset .
Total Cash Outlay = (-$250,000) -500000 Total
LOC = (-$544,797) -600000
Cash
Outlay
Your total Cost = (-$794,797)
-700000
If you are disciplined enough to make monthly
payments into a savings account to accumulate -800000
$25,000 over 4 years to pay cash for your next -900000
car, your LOC will be less, however, you'll pay
income taxes on the growth of that money in a
taxable savings account or money market fund Harness The Incredible Power Of A
Strategy That Has Been Around For
Over 200 Years, But Which Very Few
Those Are The 3 Most Common Choices...But People Or Financial Advisors Know
There's a Fourth, And Very Intriguing Option... Or Understand...
AND ... Here's How It Works...
9. Your monthly payment is $604/month for 40 years, the same as you
would pay if you took out a bank loan.
When you start a business, whether it be a finance company or any other
kind of business, isn't there always a "start-up" or "capitalization"
phase? Of course there is. And since you're building up your own "bank"
or finance company, there's a capitalization phase necessary to do that. In
this case, it's going to take a 5-year start-up period.
After the fifth year, there's enough in your account to withdraw $25,000
and pay cash for your car. Then you start making your $604/month
payment to your own "bank", instead of to the finance company.
This is a commitment you must make to yourself—to make the same
payment directly to your own "bank," just as any outside banker or lender
would have required. Remember, there's no such thing as a "magic
bullet"—this is what it takes... this is a strategy for practical people willing
to make a change in how they manage their finances.
10. Your Total Cash Outlay over 40 years is $289,920
(the same as if you financed your car through an 500000
outside finance company), however it's all going into
your own "bank" instead of someone else's (which is
Growth
why it's listed in the "positive" column) and... 400000
Over 40
It grows to a Total Value of $461,139 in your Plan
Years
in 40* years and... 300000
It grows with triple compounded interest, the
"Eighth Wonder of the World," because... Total
Cash
First, you earn money on the principal you pay in 200000
Outlay--
Second, you're earning money on the interest you but goes
into your
would have paid to a finance institution own
Third, you're earning interest on that interest! 100000
"bank"
Because you had a "capitalization phase" of 5 years
to start your own "bank", you're getting the use of 9
cars over 40 years, instead of 10 cars in the previous 0
examples .
* Based on current interest rates and assumptions and individual contracts and
withdrawal features
11. Now think about this...how much did those 9
cars really cost you?
They really cost you NOTHING, since
you recaptured every penny in your
own "Bank" and then some!
12. $600,000.00
$400,000.00
$200,000.00
$0.00
($200,000.00)
Loss
Over 40
($400,000.00)
Years
($600,000.00)
Growth
Over 40
($800,000.00) Years
($1,000,000.00)
Option 1 Option 2 Option 3 Option 4
Lease Bank Loan Cash Become Your Own Banker
(-$259,888) (-$377,409) (-$794,797) +$461,139
13. [i.e. from a negative -$377,409 cash outlay through a Bank loan, to a $461,139 POSITIVE GAIN
to you when doing it through YOUR OWN BANK!]
And that’s just for one car! After 5 Years, You'll Never Have To Go To A Bank or
Finance Company Again To Finance Your Car, And...............
You'll be recapturing every cent you would have paid to them!
The money you recapture will grow steadily in your Plan and you can borrow your
equity in the Plan whenever and however you want, tax-free, and/or you can take it as a tax-free
stream of income!
If you purchase a car or other item through a bank or finance company, and an
unforeseen event cuts off your income and you can't make your monthly
payments, what happens? They'll come and repossess your car, foreclose on your
home, send the collection agencies after you, ruin your credit rating... and in general
make your life unpleasant.
However, when you use your own "bank" to finance purchases, and your income
stops for a few months, you can simply skip some payments or pay less for a while—it
gives you flexibility and peace of mind and control over your own money.
14. 1. Even if finance companies are still offering low interest rate loans, you'll come out
ahead by taking the rebate instead and financing your car yourself.
2. Unlike a taxable savings account, you have access to the gains on your money
anytime you want—tax-free!
3. You can take it as a tax-free stream of income at retirement, and—unlike a pension
plan—there are no government limits on how much or how little you can take each year
and no early withdrawal penalties!
4. You don't have to wait until you retire to get your hands on your money!
5. You had the use of 9 cars over those 40 years and still increased your wealth by
$461,139!
6. Imagine what happens if you do this with 2 cars instead of one!
15. Your mortgage
Credit card debt
Funding college education for your kids or grandkids
Other small or large purchases you would typically finance
An equity line of credit you can use to finance things you want to buy, or
for an emergency... with the interest you would normally pay to a
financial institution going into your own pocket instead
AND ... Business owners with C-Corporations
Using this Concept, you can purchase the equipment yourself and then
lease it to your corporation...and get the interest deduction and
depreciation...and you'll recapture all the interest you were paying to the
finance company!
16. 1. You can continue to give that money to banks, finance or
leasing companies, never to see it again, or...
2. You can pay cash and give up all the interest you would
have made on your money had you invested it instead...
OR.....................................
3. You can put all that interest into your own pocket (via
your Own "BANK") and never have to go to an outside source
for financing ever again!
Be honest now, and think about it ... which of
the above options makes the most sense to
you?