How to Borrow Money Like Monopoly Man

Your ability to borrow and repay money could bring about financial ruin, or financial freedom.

Now, not all debt is necessarily bad debt, but more often than not… the world is struggling under the burden of bad debt.

This is where an entourage of our favorite financial media punditry attacks the discussion of credit in one of two ways.

How to fix bad credit, or how to stay out of debt.

The way debt gets marketed by advertisers has little to do with how companies and businesses use debt.

It’s like marketers don’t care about the usefulness of credit lines, so as long as you buy the accompanying product tied to the debt. In other words, marketers figured out a long time ago, that if you want to sell debt to consumers you have to provide some form of immediate gratification.

So many of you end up with a lot of debt, because you follow the path set out by society, which means you attend University, but to pay tuition you borrow money (a lot of money). The advertisers sell you the Honda Civic by announcing that $199/month special (need a car, get a loan, right?). You then follow the rest of the guideposts set by society, and you buy that home tied to a $300K mortgage.

All of that spending leaves you $400K in debt. All it took was 3 major purchases, and you’re already $400K in the hole.

Many of you arrive here before you’re even 30-years old (many of you end up f-ing miserable because of this).

Lots of bad debt, hurts your psychology, and even your ambitions.

Starting a business? Out of the question, too risky. Getting out of debt? Out of the question, takes too long, too much debt.

People act less rationally the deeper and deeper in debt they get. So, even if they could solve the problem by breaking it down into steps, they just double-down on a cycle that deepens their financial problems.

Meanwhile the banks…

Whether unsuspectingly or out of desperation the big banks came up with these three major loans, which is how they maneuvered the bulk of society into a lot of debt, thus allowing the banks to reap interest income off of millions of hardworking people.

Contrastingly, banks know this, which is why they market the education, auto, and mortgage loans the most aggressively.

You can verify this, by looking at any bank’s financial report, which they report to shareholders. Every quarter, they’re always communicating to shareholders how they can increase their lending while reducing risk.

The consumer lending segment of a bank is much bigger than their commercial lending, which is why the bulk of society tends to borrow as a consumer rather than as a business.

Hence, the conventional wisdom leads people down a path to financial mediocrity.

However, you don’t have to follow that path.

You don’t have to use loans for the sole purpose of enrichening banks, and bank shareholders. I say this, even as I own shares in bank stocks, because I’m a little wary of the trends in society, where people are using debt poorly.

If too many people use debt poorly, it all ends poorly.

If more people use debt intelligently, we’d be a more prosperous society, with more jobs, and more self-selected entrepreneurs.

From listening to tech entrepreneurs, tech billionaires, i.e. the Silicon Valley elite… many of them are wondering how as a society we can create enough self-sustaining jobs for a world where automation, and various other technologies are reducing the need for human labor.

So, if people are borrowing to the hilt, using wage income to pay down their debt. What happens when we have a debt-ridden society that can’t find enough work, but is left with all this debt?

It just ends badly, like recession, or perhaps economic depression.

I can’t change the trends in society, or macroeconomic cycles.

But, I can explain how you can use credit to solve business problems, which is where debt comes in handy.

Over the course of business, you will encounter what’s known as slow-paying customers. Whether you like it or not, you’ll eventually encounter the issue of payment cycles. You may have highly reliable customers, but the payment cycles are like 60-days or even up to 90-days.

Those anticipated payments are commonly referred to as receivables.

So, you know the company will eventually pay the money, but it’s going to take longer than a couple weeks to receive the cash.

This is where it makes sense to finance your business, or to cover your short-term expenses, without needing the money from your various customers who pay slower. So, you borrow money from the bank , or a credit card to cover your payable expenses until the money arrives from your slow-paying customers.

Upon receiving the money from your customers (30-90 days later), you pay down your credit card, i.e. credit line, so you’re no longer in debt. Your business is still operating, and you can finance the next round of receivables and avoid payment default with any of your vendors, suppliers, workers. 

From my own experiences working with bigger businesses, they tend to pay slower. So, even if you have that Fortune 500 client, if you don’t have cash to bridge the payment cycle, the payment cycle messes a lot of stuff up. So, if you can smooth your cash needs with debt, that’s one additional way debt can help you, even if you’re struggling early on.

I’ve seen people save their businesses by using debt in this format, and it’s why I’m not discouraging the use of debt, but rather the poor use of debt.

Another example when debt comes in handy.

Imagine you knew the numbers to your business, or let’s assume you do.

You run some tests and establish that you can acquire customers for $80 (a very realistic number), and that’s your customer acquisition cost. I use this number, because I’ve worked with businesses that have acquired customers for around that amount of money (so I’m presenting real numbers from the real world). 

So, in this scenario you spend $100,000 on advertising, and also borrowed that money. You acquire 1,250 customers at $80/each. Those customers purchase a product that’s priced at $240, so you net $300,000 in revenue from 1,250 people purchasing a $240 product.

You then payback the $100k loan. But, let’s also assume you paid $5,000 in interest expense over 3-months (30% APR over 12-months) with the first month interest free (customary to credit cards), but the other two months totaled out to around $5,000 in interest.

After paying back the loan, and the interest, you’re STILL left with $195,000.

You then subtract various business expenses, i.e. refunds, rent, payroll and taxes, so you’re left with $80k.

So, in this scenario, you made $80,000 without using any of your own money, and roughly 6.25% of your total earnings went to the bank in the form of interest.

Contrast that realistic business scenario with people who spend around 33% of their income on their mortgage. The interest is around 90% of the payment with principal representing 10% of the payment.

So, humans tend to spend 30% of their income on house interest payments. So, 30% of household income went straight to the bank’s income statement, where banks report this as interest revenue.

It’s hard to get rich in America, when you send 30% of your paycheck directly to the bank, and not in the form of paying down principal, but just to pay the bank’s interest.

So, banks get richer, people get dumber, and our society has more debt zombies than it really needs.

The debt keeps people brainwashed into working long and hard hours, so when it’s debt o’ clock, they take 30% of their income and mail a check to the bank. The bank reports that 30% of your income as net interest income to bank shareholders, and you’re not actually paying down your mortgage, you’re provided the illusion of paying down your mortgage, because of the interest schedule on the mortgage.

Let’s pretend we’re in school today.

You have two options below, which option would you choose?

Option A) Pay the bank 5% on your future earnings but use none of your own money to grow your business.

Option B) Take 30% of your earnings and give it to the bank to buy a house with no intention of renting it out.

Most people choose option B.

Banks know businesses are harder to make money off of, because that’s how the math works out.

Banks are reliant on a nation of consumers willing to buy mortgages, and car loans to keep the mill running.

Heck, I rely on this pattern, otherwise my bank stocks would go to zero, and I’d be one unhappy shareholder.

I’m not saying societal values will ever change, or behavior is going to change. I’m just saying, don’t fall for this crap.

Arguably, it’s not as elegant, or flashy to borrow $100k to build a business versus borrowing $100k to buy a Corvette Z06.

Most people with access to the same amount of credit, would buy the corvette, and say f-you to business.

So, even if you come across a great opportunity, or idea, and even have the credit, or the means to act upon it… your mind might fool you, so a good decision is a bad decision, and so you make the dumbest of financial decisions due to impulsiveness. 

How you live your life is up to you, I can’t control what you do next, but I’m always wishing you the best.

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