For most people, spending money and building personal wealth are at opposite ends of the financial planning spectrum. Whether they are taking out a mortgage on a home, purchasing a new car, or buying gifts for their friends and loved ones, people will work hard and save their earnings to buy the things they need and want.
As Largo Financial Services founder and CEO Douglas Eze explains, buying gifts does not mean that you have taken a step back toward planning your financial future. However, consumers must learn to think about purchases in a different wayand use certain strategies —to ensure that they continue to make progress toward their financial goals even when they spend.
“No matter what you do, you must remember to pay back your future self,” Eze says.
What does this mean for the average shopper? For Eze, it means viewing yourself the same way you do credit card companies, and not only repaying yourself for purchases—but repaying interest as well.
This is particularly important when making cash purchases. As an example, someone who is planning a family trip may use their credit card to finance the vacation. Once the trip is over, they repay the credit card, plus interest. But if they are making purchases (either for vacations or everyday items) with cash, they don’t consider paying themselves interest on those purchases.
“The best way to pay back your future self is by acting like you went to the bank and borrowed the money,” Eze says. “When you start paying that money back, apply interest.”
Consumers can then put those funds into something like cash value life insurance, accruing interest from a life insurance contract. By doing it this way, people can ensure that the purchases they make today never “rob from their future selves.” Instead, they will pay themselves back—plus interest—and continue to grow their personal wealth.
It is a unique method of budgeting that Eze teaches his clients, and over time, it will pay incredible dividends to people who commit to the process.
“Let’s say you spent $5,000 this past month for purchases, you get out your calculator and do some simple math,” Eze says. “You borrowed $5,000 from your future self. Five years from now, if you took five percent interest, your monthly payment will be $94.36 for that five-year loan.”
Instead of thinking about cash payments as a form of self-financing, Eze says you can be much more successful if you imagine your future self, loaning you the money for your purchase.
“With the $5,000 loan, it will take you five years to pay back your future self $661.37 in interest,” Eze says. “So, this is a way to really force yourself to start saving.”
There is nothing inherently wrong with planning vacations, buying gifts for loved ones, or making everyday purchases with cash, Eze says. But if you want to build your personal wealth at the same time you spend your hard-earned cash, Eze says the best way is to become more like a bank yourself.
Instead of simply paying cash for items, if you imagine yourself in the future, loaning you the money to buy what you need, then you will get into the rhythm of paying yourself interest on everything you buy.
And that, Eze says, can have incredible results.
Douglas Eze is the founder and CEO of Largo Financial Services. He launched his company with the vision to provide individuals and small business owners with the education and guidance needed to achieve financial freedom.
To learn more about their financial services, please visit www.largofinancialservices.com.