One of the ways that individuals and small businesses can be successful is to study the things that make large businesses successful.
A good example involves what’s known as opportunity cost. Most of us have an inherent understanding that when we pursue one opportunity, we often have to pass up another opportunity. When we pay off a credit card with a 10% interest rate, for instance, we forfeit the possibility of investing that money in the stock market, where it might earn 20%.
Successful businesses pay close attention to opportunity cost. When they invest capital back into their company to help it grow, they understand that they are giving up the chance to deploy that money in potentially more profitable ways. They could invest it, for instance, or buy back stock in order to benefit their shareholders.
So when these companies disburse capital to their business units, they insist that those operating units generate a return on the capital that is greater than what it could return if put to other uses. The bottom line is that when a business recognizes that its capital has an inherent value, it can deploy that capital to its fullest potential.
The good news is that it’s possible for individuals and businesses alike to become more successful through an awareness of opportunity cost. And the possibilities extend beyond making smart choices about what to spend money on.
An invaluable tool in managing opportunity cost is permanent life insurance, which I help clients use as the centerpiece of what I call a Private Vault strategy. The strategy involves customized insurance policies that enable you to rapidly establish a large cash value. That cash value serves as collateral for loans made to you from your insurance company.
The Private Vault allows you to borrow against your policy’s cash value for purchases like homes, cars and even retirement expenses. The key is that the cash within your policy continues to earn a return even while your loan is outstanding. In other words, the strategy eliminates the opportunity cost of using your money for purchases. You can make your purchase and continue to grow the money against which you have borrowed.
What’s more, borrowing through your insurance eliminates the preconditions, onerous terms imposed by banks, not to mention their fees and interest.
There’s more than one way to make a major purchase such as an automobile. But I believe that using the Private Vault approach is the most financially beneficial. Borrowing from a traditional lender involves jumping through hoops to qualify for the loan, and of course it involves fees and interest.
Some people pay cash for their cars and other big purchases. However, this approach permanently costs you the opportunity to earn interest on your cash. In fact, since your car will depreciate in value over time, it guarantees you a loss.
Others like the approach of financing the car and investing their spare cash. The idea is that they can earn a return greater than the interest rate and fees they’ll pay for the car. However this requires a high rate of return on your investment, and when you invest in the market there are no guarantees of making any money, period.
On the other hand, by using a Private Vault to finance major purchase such as a car, you ultimately recoup all of the principal: As you repay the loan, the cash used as collateral becomes available for you use once again. You don’t pay interest or fees to a bank. To the contrary, you continue to a positive return on your cash. You have your car, and you have built wealth for yourself. By understanding and avoiding opportunity cost, you’ve had your cake and eaten it too.
For more information about the Private Vault strategy, please contact us.
