Financial Education that Sets You Free
-Are you trying to tell me that
if I get this, I will be able to dodge bullets?
-I am trying to tell you that if you get this,
you won’t have to.
Most of us stumble upon a financial education by way of trial and error coming in contact with the monetary and banking systems.
Since school does not teach us how money is created and how the monetary system works, we have no idea how to thrive in any economic conditions.
That is why major economic and financial market crashes come as a devastating storm setting many far behind from financial goals.
Only a few understand the workings of the monetary system, and that is why they become wealthy.
In order for us to create wealth, we want to know what wealthy people know and practice.
How is Money Created?
You’ve all heard that we live in a debt-based economy.
Money is created when by way of extending credit and selling debt-based securities such as mortgage backed securities, insurance backed securities, real estate tax liens, etc..
Furthermore, due to the growing amount of debt, fiat currency loses its value overtime by design.
The exponentially increasing United States debt currently exceeds $21 trillion, it is essentially unpayable.
You can verify this number at usdebtclock.org.
Debt results in currency inflation and leads to diminishing purchasing power.
The Federal Reserve Bank, which controls United States and world central banks, officially indicated that the purchasing power of the dollar fell below 4 cents in May of 2018.
In the highly managed realm of Wall street, the stock market and the industrial Dow Jones Industrial Average Index (DJIA) define the strength of the dollar.
According to them, the dollar has been rising in strength because the Dow Jones Industrial Average index has been exponentially appreciating and the stock market has been booming since the fall of 2017.
But does the above premise of the dollar strength make much sense if the value of the dollar is zero?
Zero times a trillion equals …zero.
Cash might have been king a long time ago, but as a wealth preservation mechanism it no longer works.
We must invest in cash flow producing assets, preferably tangible.
Asset versus Liability
Financial education of the wealthy comprise an understanding of an asset and a liability and its application in practice.
First, we must clear a common misconception:
the house you live is not an asset. It is an asset (bank’s and insurance company’s), but not yours.
The way you can turn it into an asset is to rent it out to a tenant.
Investopedia defines an asset as:
a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent.
To simplify it:
An asset is an entity producing cash flow. Consider buying an asset for a balance sheet, and use that asset later to buy a liability.
Print it and tape where you can see until it is carved in your mind.
The house you live in is a liability because it does not yield positive cash flow. The only time real estate becomes an asset, when it can be leased or rented out.
Assets typically cover the cost of acquiring a liability. Rental real estate is one of the highest cash-flowing assets in any economic condition. A vehicle is a liability (unless it can be leased or rented for profit.)
Wealthy people use assets to buy liabilities. Profits from rental real estate or land buy cars or items of desire. Liabilities should be paid for with assets not with your labor or debt.
A balance sheet reflects the ratio of assets and liabilities of an individual or a corporation.
Creditors use the balance sheet to evaluate risk, to determine whether a company qualifies for a loan and to decide the terms of the loan.
Experienced investors use the balance sheet to evaluate whether a company stock is worth their investment.
An income statement reports financial performance of a company or entity.
Unlike a balance sheet which represents a snapshot in time, the income statement reflects revenues and expenses over a specific period and identifies the net profit and losses for that term.
Physical, Paper, and Intangible Assets
All cash flow producing assets can be separated into groups – physical, paper-based, and intangible.
Since data is mostly recorded in a digital format, many paper assets can be fairly qualified as digital, thus we will use the terms “paper-based” and “digital” interchangeably.
Physical assets include rental real estate, land, leasable vehicles.
Paper-based digital assets include gold and silver ETF (exchange traded fund) options, real estate tax liens, dividend paying stocks and funds such as REIT (real estate investment trust), etc..
Intangible assets pertain to intellectual property and licensing of that intellectual property. you may receive royalties from the use of a patent, a book, or software, or any other intellectual property licensed to you.
We gain financial independence by understanding the main financial principles outlined above and by practicing financial self-reliance; save at least 80% of your income so you can invest and eventually become your own bank.
We discussed earlier a premise of not needing external insurance.
Hypothetically, if we have a sufficient reserve of money or assets, we do not need to buy insurance products, do we?
However, the law requires us to have insurance by imposing penalties if we fail to obtain. For example, in order to drive a vehicle it has to be insured.
Otherwise, you are subject to fines and penalties. So can we legally avoid buying third-party insurance? Yes, we can.
The LLC structure allows to open a bank account and to deposit a cash collateral that waves the requirement of third-party insurance.
Wealthy people use the LLC structure for tax deductions and tax liability reduction. LLC also enables them to avoid buying insurance from a third party.
An attorney will be able to provide information on how to set up an LLC and how to set up an indemnity retainer (proof of financial responsibility).
It is just one example of how you can start practicing financial self-reliance.
Buying a house does not constitute a need for a conventional bank loan.
A lease-to own option by way of negotiating favorable terms with the seller directly enables you to bypass the conventional lending system and to avoid getting stuck in 30-year mortgage
You can draft the contract so your monthly payments go toward the cost of the home as well.
It does require perseverance and creativity because you may need to look at 20-30 deals instead of 2 or 3.
However, it will lead to your financial independence long term.
The Infinite Banking Concept promotes the principles outlined above.
The philosophy of the Infinite Banking practice encourages us to become our own bankers.
Financial health resembles physical health: without knowing our own body and following natural healing principles, we cannot be in good health.
By the same analogy, we cannot become truly financially free and prosperous without understanding the discussed money principles and without practicing them.
I personally do not advocate the infinite banking concept. I do advocate personal responsibility for your money and wealth.
Once we become financially free, we want to preserve our wealth.
Storing wealth in tangible assets such as precious metals, real estate, land rare art, collectible gold coins gives protection against inflation and economic upheavals, and preserves our purchasing power.