Published August 11, 2005

Capitalization of our own personal financing system should be a top financial priority for every man, woman and child in this country. It’s money that fuels the engine of capitalism and its money that fuels our personal economic engines as well.
The system that brings this fuel to all of us demands a profit. As long as we rely on external systems for capital we are tolerating a certain loss of wealth. Many of us, and I include myself here; have used the traditional banking system as our primary source of financing for our lifestyle needs.

Unfortunately, many of us do not have another option for finance. The reason is simple; we have not been taught how the banking systems work and we have not been shown the financial potential available to us when we control our own financing system. I believe that if we understood the true costs involved we’d find the motivation to overcome Parkinson’s Law.

According to the National Business Associations 2005 report; “ 82% of businesses fail due to poor cash flow management skills followed closely by starting out with too little money.” As individuals trying to save for retirement, college funding, or the purchase of a car, we suffer the same problems as business owners. We generally have poor cash management skills and we’re under funded, consequently we solve our dilemma by borrowing from banks and finance companies or other sufficiently capitalized entities i.e. parents.
The problem we encounter is that we have not yet overcome Parkinson’s Law which states “Expenses rise to equal income,” and “A luxury, once enjoyed, becomes a necessity.” Ever notice how, no matter what our income, we always find a need that consumes it and although a Honda was great in college, one really needs the comfort and safety that only a Mercedes can provide.

Is it too late to change? No, never, but first we need to overcome Parkinson’s Law. This is, in fact, the first job of a financial planner. Utilizing efficiency planning techniques we can help our clients overcome Parkinson’s Law. Once we have accomplished this we need to, dare I say it:
Save.
What should we do with our savings? Take note. Just as any business owner has a period of capitalization, i.e. no profit, so shall we. We need to spend the next 18 months or more capitalizing our business.

Don’t get stumped on which investment to choose. We can discuss that later, for now we are just taking into account the need to save. We need to practice overcoming

Parkinson’s Law.
Remember, we are not making an investment with a focus on the return we can generate, but rather, we have made an investment of capital in a business that can now generate profit by recapturing our lost wealth. Once we accomplish this, we will put the wealth to work for ourselves, our children and our grandchildren. We will begin to bank on ourselves.

To clarify the power of banking on ourselves, let’s consider an average family purchasing a car every 4 years and spending $10,550. each time over a 40 year period. If you finance those 11 vehicles through the dealership at 4.99% for 48 months the total financing cost to you at the end of the 44 years is approximately $128,256. Paying cash, which utilizes a classic sinking fund method, represents a total cost of $116,050. However, by becoming our own bank we can purchase our vehicles and recapture that lost wealth for a profit of $335,099.*

If a BMW is more your speed, take into account that the more expensive the automobile the greater the cost using traditional financing but on the flip side, the greater the recaptured wealth (profit) as we bank on ourselves. So, I support spending as long as you continue to overcome Parkinson’s Law and systematically use your wealth wisely.
If you are someone who is ready for the next step and really needs to know where to deposit your capital. Congratulations! Just as those starting out, it’s time to call your financial planner.

*(Monthly payment @ 4.99% for 528 months less cost of acquisition of automobiles)

—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.