Content: Page 42, Becoming Your Own Banker Fifth Edition

Having just completed Methods, A, B, and C, we continue our study of the five methods of financing the use of an automobile. Do you realize that, thus far, we have covered the methods used by at least 95% of the American public? And by looking at the graph isn’t it evident that there is not a great deal of difference in the results of them? None of these methods has addressed the need for capitalization – the creation of a pool of money from which to make the purchases and also large enough to accommodate the needs of some other people, too. It is true that Method C is building a pool from which to make car purchases – but it is not big enough!

Remember the grocery store described in Part One. If it is only large enough to serve your own needs, you won’t have much of a successful business. A number of years ago in an article in FORTUNE magazine, Professor James Bryan Quinn of Dartmouth estimated that it takes a corporation seven years to show a profit on a new product. This may take some people by surprise and think that he is overstating the case. But we foresters would counter that he is understating it – it’s more like 25 years! Taking a clue from Quinn’s observation, why not accumulate money over a seven-year period of time and at a somewhat higher annual amount, say $5,000.

In covering these last two methods, D & E, let’s imagine that the two are twin sisters – one chooses method D and the other method E. The first one – we’ll call her “C/D Sister” – accumulates money on a monthly basis in a savings account and buys a Certificate of Deposit (at someone else’s bank) in the amount of $5,000 each year with a yield of 5.5% interest. Show me someone who does this for seven years – just to build a banking system – and I will show you someone who has whipped Parkinson’s Law. She will win by default in comparison with her peers, because they can’t discipline themselves to do so.

This young lady will also attract the Willie Sutton types – the Internal Revenue Service – and they will take 30% of the earnings. The net effect is that she will earn 4% after taxes. Table (1) on page 45 will show the results of this procedure. The C/D account now has an after-tax accumulation of $41,071.13 at the end of seven years.

Now it’s time to start the self-financing of car purchases from the system. A word of caution is in order – if she is dull enough to let the salesman at the auto dealership know that she has over $40,000 in her C/D account the salesman will most assuredly say, “ Lady, you don’t need to be looking at a Taurus – let me show you this BMW!” But this young lady has done some studying and recognizes that if she jumps through that hoop she will end up with the same results as Method C, except on a grand scale.

So, she withdraws $10,550 from the C/D account – takes it plus her trade-in car and purchases the Taurus. She continues to fund the monthly savings account and annually withdraws $3,030.00 from it to purchase a new C/D. She is playing “honest banker” with herself – but she is using someone else’s bank to do it. She has no ownership of that bank and is earning only the interest that the bank is paying her.

• There are several “characters in the play” that must be considered:
  The Stockholders or Owners of the bank – earn dividends.
  The C/D holder – earns interest.
  The Administrators at the bank – earn salaries.
  The Borrower of money – Pays interest – an absolute necessity in the whole scene. Nothing happens without him. He pays for the whole works listed above.

Table (1) on page 45 shows the results of this procedure over the same 44 years as compared with the previous three methods. Figure (1) on page 41is the graphical depiction of the data in Table (1). There is a significant difference between the results of Method C and Method D. It is the result of three additional years of accumulation and all seven years are at an additional amount, in this case it is $5,000. She is taking the necessity of capitalization seriously. The results speak for themselves.

In Lesson 27 we will look at the results of her twin sister who builds her banking system with the identical cash outlay through dividend-paying whole life insurance.