There’s no doubt we live in an economy that favors the rich. And I’m not talking about tax laws, corporate lobbyists, unlawful LIBOR fix scandals, or the arguments made by the the 99%. I won’t deny that those things exist, nor will I deny that there are some greedy people out there who will bend or break the law to get richer – but that’s not what I’m talking about in this post. I’m simply talking about a capitalist economy that’s driven off debt and credit. It’s an unfortunate byproduct of capitalism – The people that don’t have money need to borrow it and pay interest, thus digging a bigger debt. Meanwhile, the people with all the money lend it out with interest, thus creating a bigger stockpile. If you view it that way, capitalism seems pretty evil. While capitalism does enable some to rise from nothing to greatness (the American Dream), credit and debt still are part of this infrastructure for the rich to get richer, the poor to get poorer, and the working class to get more work (to cover consumerism, a key ingredient to successful capitalism from a macro-economic viewpoint).
So if debt and credit are key to the capitalistic economy, then there must be debtors and creditors. Being a creditor simply means giving away some of your money today, for more money in the future. People borrow money for many reasons, but they all have one thing in common – when they borrow my money, they are now working for me.
A Simplified Creditor/Debtor Example
Let’s say Joe and Sally each have $10,000. Both have no mortgage debt, and each have a job where they are able to save $200/month after all expenses are paid. Joe has a bike, and he rides it to work. Sally, however, wants to buy a new car for $18,000 so that she can ride in with a little luxury. So Sally asks Joe to borrow $8000 to cover the portion of the car she can’t afford, and they agree on a 10% interest rate to be paid out over a 5-year term. Both are happy with the deal. Sally gets her shiny new car, and Joe figures he’ll get a little extra income while doing no additional work.
At the end of the first month, Sally owes Joe $170 ($67 in interest and $103 in principle). Luckily, she has $200 left over from her paycheck after paying all her other bills, so she walks away with $30 in savings for the month plus she still has a pretty new 1-month old car. Joe, on the other hand, has his $2000 left over after lending money to Sally, plus the $200 he has leftover from his paycheck plus the $170 he just got from Sally. So Joe’s got $2,370 after the first month.
A year goes by, and Sally keeps making her payments to Joe right on time. And at the end of the year, Sally has $360 in the bank compared to Joe’s $6439. Sally’s car is still pretty new, and she certainly hopes it stays that way since she couldn’t afford any maintenance on the car. Joe’s feeling pretty good though, his bank account is increasing by $370 every month and he’s thinking about looking for new ways to invest it.
2 more years go by, and there’s been layoffs at work. Sally’s getting worried she might be impacted since she only has $1,080 in the bank, and her cars not as new as it used to be. If layoffs come or if her car fails her, she’s got no buffer. Joe, on the other hand, has $15,319 in the bank, more than enough to cover a few months if he were to be laid off.
Finally, after 2 more years, it’s time for the final payment on the car. Sally write’s that last check for $170 and it couldn’t have come too soon. After 5 years, all Sally has is $1800 in the bank, a 5-year old car that needs some new tires, and a lot of stress about not having an emergency fund. So she hands Joe the check and says thank you. Joe interrupts her to say “No, thank you Sally. You’ve made me quite rich.” Sally doesn’t understand, she thought the loan was a very generous favor from her friend. After all, she’s driven a car for the past 5 years, largely because of the money her friend was willing to lend to her. “After all, you’ve paid me $2200 in interest over the past 5 years and you never missed a payment. ”
Now imagine if Joe has $80,000 and 10 friends named Sally. Or imagine if Joe reinvested his money as it was coming in (compounding interest).
The moral of the story: you can be Sally and have your $1800 bank account, 5-year old car, and a lot of stress…. Or you can be Joe with his $24,200 bank account, his bike, and the freedom that $24,000 gives him. I choose to be Joe, and let Sally work for me.
But this article isn’t about the virtues about riding a bike rather than a car. It’s about the advantages of being a creditor rather than a debtor. Riding a bike isn’t the only way to save money, and lending to friends isn’t the only way to loan money. Here are a few examples of ways to make your money work for you…
There’s no shortage of companies that will take my money in the form of corporate stocks. In fact, they aren’t just borrowing my money, they are allowing me to buy partial ownership of the company. From that point forward, everyone in that company is working for me. Each morning my employees get up, drink their coffee, and sit in traffic just so they can work for me. They sit at their cubicles and in their labs and factories, they design things, build things, and provide their services – all for me, while I’m sitting at home enjoying life. And all I had to do was buy them with my money.
On top of that, I’m in total control. While they’re toiling away with their work, they’re also forced to provide financial statements to prove that they are profitable and that they’ll be able to continue to pay me my dividends that they’ve been paying me for years. As soon as those reports turn south, I can simply sell out my portion of ownership to someone else, and look to buy ownership of a new company. Maybe even a competitor – since I don’t have to be loyal to them.
For years now I’ve viewed the bank with partial disdain and partial envy. The banking system is set up such that banks can “hold” other people’s money while paying them a fraction of 1% in interest, then turning around and lending out 10x that amount to other people for several percentage points higher. So if I give the bank $100, they can lend out $1,000 to someone else while charging 4% interest. If only we all could do that. Unfortunately, we can’t.
But there is a way to “be the bank,” and that’s through P2P Lending. People want money now, and they are willing to pay a high premium for it. So as long as they promise to pay it back, I will lend it to them. And every single person I lend to is now working for me. While I’m sitting here writing this post, there are hundreds of people out there working hard to pay back their micro-loan to me plus a high interest rate.
Hard Money Lending
Hard money lending for house rehabs is one of the more rewarding ways I’ve found to make my money work for me. Not just because it’s one of the most profitable (although it is), and not just because it’s a reasonably safe loan with hard collateral backing it up (the house), but also because it’s restoring an old structure and creating a new home for someone.
For hard money lending, I’m buying a team of people to work for me. And much like with Joe and Sally, the team views it as a success to get my money, where as I view it as a steal to get all these people working for me and paying me to do the work. I get a real estate investor to find homes on the cheap, hire construction companies, roofers, painters, carpenters and plumbers to restore the house. Then that REI hires a real estate agent and a lawyer to find a buyer and close on the house, all while I’m out riding my mountain bike and collecting 10% interest or more. If the deal goes well, I can rehire that team of people again. If not, I can move on to a new team.
Of course, there are many other ways to lend money and get people doing working hard for you. But the point is this – you can be the debtor, or you can be the creditor. Capitalism highly favors the creditor, and the wealth gap is growing every day. As much as I despise that gap, I prefer to be on the better side of it.