Monday, January 25, 2016

Experiment in Self-Banking

In the past few months, I have been experimenting with self-banking. The idea is to have some money saved away, which I can borrow. After borrowing the money, I run it through a 1 year amortization, or longer. Then, I pay back the loan to my savings with interest. The idea is to progressively have a larger and larger savings after I pay off each loan to self.

I have been searching online for information from others who have created a similar system to save money and recapture the interest that would otherwise be paid out to banks. However, the search results usually come up with links to Infinite Banking Concept, which is similar to what I am doing, except that it involves whole life insurance as the source of capital. I think IBC has its merits; but, it takes years to build up and adds a "load" to the program from the life insurance. I would still do IBC because of the whole two birds, one stone business, in which one needs to be insured anyway, might as well turn it into a collateralized source of capital.

The other search result from self-banking is for ATM and online banking where you don't have to go into a bank branch. This has nothing to do with what I want to do.

The experiment was a struggle at first. The first challenge is having too little capital. If you start off with $500, then it doesn't take much borrowing to max out your "credit limit". But, with the magic of velocity of money, that $500 can build up to something more workable.

The experiment has a few defaults, as mentioned earlier. I charge myself 10% interest amortized over one year. The interest is static, so I don't bother with calculating average daily balances or early payments. Once amortized, I pay in increments spelled out in the amortization table. Some paydays I'll make one payment per loan, or several payments. The result is that my loans have been paid off withing 1 to 3 months.

The trouble I have found is that it is time consuming to track each loan and sit down to calculate how much to pay every week on pay day. I have discovered a way to save time, which involves using Goals in my account. Each loan becomes a Goal, which includes the principal and interest. Simple does the bookkeeping. I take whatever money I have accumulated in each Goal and send it to my "treasury" via ACH.

It seems like all this is a lot of bother. It was until I figured out last week that Simple could be used to track each loan. So, why bother?

Interest Expense Recapture

Instead of paying interest, I can keep the money and save it up. By paying a credit card, I would have lost the money, so it should not count towards my living expenses.

No Credit Check

If I need to borrow money, no credit check.

Flexible Repayment

The biggest problem with bank loans, credit cards, and other finance is that you are set on a strict payment schedule. If you have a tough month or somehow don't have enough for a complete payment, you get pounded with penalties and credit report dings. By borrowing from my own little "treasury", I can pay more, pay less, skip a month, or even "forgive" the loan if I choose. As long as the loan eventually gets paid back, I'm rather flexible with my payments to self.

Increasing Credit Limit

Every time I borrow and pay back, the treasury grows, which means I have more money to borrow.

Some drawbacks

Of course, not everything is roses. One of the drawbacks, which I have not yet hit, is that eventually the pile of money could become "too big" to keep in a deposit account. I'm going to have to do something with the excess so that it can be collateralized. The thought is to put the excess into a margin account so that I can borrow against equities. But, one step at a time.

Another drawback is that my paycheck is already spent every week. The same urgency one feels when having to repay a credit card is the same urgency when you are the lender. I have one single credit card with a $300 limit that I use for spending. I pay off that credit card every week, which involves a loan with interest, which I pay back from my paycheck.

I could cashflow my spending; but, once I started looking at time value of money, it seems that any expense should account for opportunity cost. Thus, I am perpetually in debt to myself. I guess if I'm going to be a slave to the bank, I should own the bank.

The biggest drawback is that I know that this fictional bank is, well fictional. I'm willing to put up with the shenanigans mainly because I would have been doing it if I were using outside financing. So, I'm all in with the fantasy, as it gives the whole savings process a narrative. I could simply pay my bills and save money in an account like everybody else, without wasting time with loans, interest, and perpetual debt to myself.

I'll report on my progress in the coming months.