Published July 21, 2005

I’m in the money business, and as a result my daughters often overhear me discuss real estate prices, home equity issues, retirement planning concepts, personal savings and other money matters with friends and family.

I was reminded of the misconceptions that many of us have in relation to money as I traveled to the Sierras with my two daughters this past week.

Traveling along Interstate 5, I began to reflect on recent conversations my daughters and I have had. After hearing me discuss home prices one of my daughters recently asked “Daddy is our house worth a million dollars?” then “Do we have a million dollars in the bank?” These questions are simply a way for them to compare their life to everyone else.

In the world of finance these comparisons are useful. For example, if we were all worth ten million dollars how valuable would that be?

We all need a sense of where we stand in relationship to everyone but these comparisons only tell part of the story.

For many adults our understanding of money incorporates many of these same comparisons while our perception and understanding about the use of money remains elusive.
In general, when people speak of money and wealth they mostly make comparisons. Here in California our home equity currently represents the majority of our wealth. Cocktail parties buzz with discussions and comparisons about the value of real estate and the most recent sale of a home just around the corner.

What many of us are missing, not unlike my children, is that while we are so concerned with our home values and market performance, we are missing an opportunity to accumulate wealth by thinking more like bankers.

Bankers, for the most part, are concerned with the use of money. All banks work to accumulate assets in the form of deposits.

The banks assets are the tools that allow a bank to generate a profit. Yes, some of the assets are invested on a daily basis, but I don’t believe a bank couldn’t survive long on just its overnight investment returns.

I know this sounds obvious, so bear with me.
Bankers generate profits by lending money to individuals and businesses at a higher rate of interest than that money costs the bank.
So, they pay us .25 percent on our savings, and loan those funds out via credit cards at 12.99 percent. The arbitrage between what it costs to borrow the capital and the income that can be earned lending that same capital to others represents the banks profit. That’s banking and it’s that simple.

Why do I concern myself with this distinction?

What would happen if we, as consumers managed our personal finances more like a bank? What if we, individuals and business owners, focused on our use of capital?
Let’s be perfectly clear, the use of money concept is not maximized by saving money and investing it.
It’s appropriate to invest accumulated money only when it is no longer useful or prudent to use that money in the generation of profits.

Basically, we have made a decision to no longer use that money for banking purposes.
In my opinion, our task is obvious, simple, powerful and achievable. We need to take back control of our wealth. To do so, we must use our accumulated money to finance our lifestyle in a way that allows us to recapture lost wealth.

It has been estimated that as much as 34.5 cents of every disposable dollar is paid out in interest. (Nelson Nash Infinite Banking 2003) If we were to recapture this lost interest, would that not represent a 34.5 percent return on our money?

We need to step into the role of the bank for financing purposes. By doing so, we have an opportunity to participate in the arbitrage associated with the financing of our daily lives.

Think about it and look for my next article when I’ll discuss the human factors affecting our ability to capitalize our money machine as well as illustrate just how much wealth we are forgoing when we choose not to bank on ourselves.

—Stephen Bossio is the principle of Magnum Financial (Smart Money + Good Thinking) and can be reached by phone at 707-996-9664 or sbossio@sammonsrep.com.
Stephen offers securities through Sammons Securities Company, LLC Member NASD and SPIC.