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This may sound like a silly question; it is your money after all. You can do whatever you please with it. And that is exactly what we do – we become the bank. Without any experience in lending, we start dishing out loans, to ourselves, friends and family, etc. We end up with a massive pile of bad debts – money that is never repaid. If we were to be a bank, we would sink under a pile of bad debts such that the CBN would be forced to shut us down. When was the last time you repaid money you borrowed from yourself?
Why do we borrow from ourselves?
The main reason is that we do not fully understand the principle of pay yourself first and asset allocation. When you pay yourself first in the true sense of the word, you have no access to the money thereafter. For all intents and purposes (including spending or borrowing), it does not exist. It is somewhere working for you so that you don’t have to keep working for money. In terms of asset allocation, money invested in your financial security plan is meant to provide you with fixed income you do not have to work for (passive income). That means if you lose your job without warning, your business is down or your Pension Fund Administrator starts playing hide and seek, your life goes on normally. It is meant to be an additional source of income, your insurance, so to speak. It is the roof over your head when the proverbial rainy day shows up. You don’t sell your house and move in with a relative simply because you need money to lend to someone in need or start a business. Your house provides shelter from the storms and rain. Your financial freedom plan does the same – shelter from financial storm and rain. When you borrow from your fixed income portfolio, you remove parts of the roof over your head. Sometimes we eliminate it completely and leave ourselves open to the elements.
There is nothing wrong in giving. It should be a lifestyle and you should have a budget for it. There is also nothing wrong in saving up to start a business, make a big purchase, etc. The issue is borrowing from your reserves, which is invested in fixed income assets and is providing another stream of income, no matter how small. Your job is to keep building on it until it reaches the critical mass whereby monthly interest/returns from it can sustain your standard of living. This is called achieving financial independence, whereby you can live normally without your primary source of income. If you keep borrowing from it, then you are in for an endless journey to freedom.
High bank rates
Another reason we love borrowing from ourselves is to avoid high bank rates. Interest rates charged by our banks are high and discourages borrowing. That is a fact. To make matters worse, most of the loans are short-term. It favours those that buy and sell or can turn the money around in a short time.
However, if you are an employee, you can have access to funds from other sources like employee cooperative society which offers loans at single digit interest rates. Where there is none, some people come together to form an informal cooperative (which can grow into a formal one). However, you need to check what the laws say. The point is, there is always a way out. For business people, there are organisations that help small businesses access offshore loans at single digit interest rates (as an option). However, you cannot bypass the process of having a good credit rating, which also helps lower your rates when borrowing domestically.
The reality is that if you plan to grow big, you need to learn how to borrow from banks. It is called leveraging on other people’s money. As your business grows, you need money to expand. There is only so much money you can raise from yourself, family and friends. The best place to start is small – borrowing to acquire that which pays for itself (good debts). You need to get comfortable with it, so that when the time comes to play big, you won’t take to your heels. The big money is at the top, and if you want to get there, you need to acquire the skills required. For example, if you are a landlord with four flats, you will realise that you are not making up to 10 per cent returns on your investment, unless it is a very old house. There are properties that return 20 per cent and above to the owners, and it happens at the high end. At that level, the players use other people’s money.
Avoiding due process
Although we claim to run away from high bank rates, one of the real reasons is that we are not ready to go through the due process involved in borrowing from a financial institution. In most cases, our plan will simply not work. How many times have you lent someone money to start a business and everything fell flat shortly thereafter? I have fallen into the trap several times, driven by the emotion of trying to help. Instead of helping, our relationship became strained, even after debt forgiveness. An entrepreneur came up with a half-baked idea, and looked for a ‘fool’ to fund it. Let’s be really honest with ourselves. Do we have experience in lending money to business start-ups? Can a bank employ you to manage their loan portfolio? Do you have any clue how to go about it? Then why do you dabble into something you are totally clueless about? In a situation where you are the borrower, you are also the lender, what type of governance or due process is that? You are both the applicant and the approver. That is the height of conflict of interest. Is there any surprise that every application will be approved and most ventures unprofitable? Is it wise to disburse your money that way?
Every nation, business and individual should have reserves. These reserves provide both stability and another source of stable income. When your reserves run low, you are courting trouble. When you wipe it out in the name of borrowing from yourself, you have invited trouble by yourself. You may get away with it, but you need to understand you are taking a risk. And most importantly, if you truly desire financial independence, you may finally realise that you have turned a journey of 4 years into 40 years of wandering in the financial wilderness.
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