You Finance Everything You Buy: Rethinking Cash, Loans, and Opportunity Cost

There’s a truth in finance that often gets overlooked. That truth is you finance everything you buy. It sounds strange, but when you think about it, there is really only two options when you are looking at purchasing an item. You either pay cash, or you finance it. Paying cash is straightforward. You have the allotted amount of cash in your possession, whether in physical money or in debit, and you exchange that money for the product.

When you finance things, there are more options, but at the foundational level you finance things by taking a loan from a lender for the agreed upon amount, and then you owe interest on that loan as you pay it back. This allows you to have the product now, and pay for the product over time as more cash flow becomes available under the terms of the lender. You have no control over this function. It is well understood that loaning money comes at a cost, both literally and emotionally, but it’s not well understood that this equation works the other way as well. If you pay cash for something, you are giving up all the future earnings you could have made with that money.

That may sound strange because conventional thinking states you should minimize debts as much as possible. This means paying cash for things whenever possible so you can avoid paying interest. The thinking is, if you can’t afford to buy something with cash, you can’t really afford it.

Though not bad advice to help with the behavioral side of money, it’s not the most efficient use of your money. Let’s take a page out of the most well-off people in society. What they do is collect assets, collateralize those assets with a bank to secure a loan with favourable interest rates, then watch as their assets grow in value faster than the interest can accrue. This leaves them with a net positive on their balance sheet. Yes, they have debt, but that debt is working in their favour. It is allowing their wealth to grow. They have found a way to access money to finance the things they need in life without interrupting the compounding and growth of their wealth. They just think differently about money.

To think differently we need to understand that the lost opportunity cost is a real thing and it adds up over time to have a big impact. If you pay cash for everything you are essentially running off of a massive sinking fund. You save up your money in an account where it is likely not making you any money, then you spend it on the things you need putting you back at zero. This can continue forever. You will never get behind, meaning your account will never get below zero, but you will never get ahead either.

What’s missing is all of the interest that you could have been generating with that money during its build-up phase and even beyond. Even better if you can create an asset like the ultra-wealthy do that continues to compound and grow uninterrupted even while you access someone else’s money through collateralizing it to pay for the things you need in life.

There just so happens to be a tool that anyone can use to do this. You can put your money in a place where it will compound and grow uninterrupted for life, creating a very powerful asset, and then collateralize that asset to access money at favourable rates. Better yet, if you are a part owner of the lending institution, then you get to share in the divisible surplus generated from its loans. So, your asset can compound and grow, you borrow money against the asset, you pay interest, but get the interest back in the form of a dividend. This means you don’t have to lose out on the opportunity cost of your money because your money is growing faster than the interest is accruing, then you get the interest back in the from of a dividend. It’s a double win.  

You can use a Dividend-Paying Participating Whole Life Insurance Policy as a personal banking system. Instead of paying cash directly for your purchases, you can take a policy loan against your insurance policy. By doing so, you essentially finance the purchase through your own "bank," keeping the cash value of your policy intact and continuing to grow. While you repay the loan, your policy’s cash value keeps earning dividends and interest, thereby recapturing the lost opportunity cost you would have incurred had you paid cash outright.

Moreover, the beauty of using your policy for financing is that the interest you pay on the loan goes back into your policy, not to an external lender. This means that you are effectively paying yourself back, with interest, further enhancing your wealth over time. In essence, you finance everything you buy, even with cash, but by using your policy, you ensure that your money keeps working for you long after the purchase is made.

Here's an example. You need to do some home renovations. It’s going to cost $30,000. You can either save up and use cash, which leaves you with no debt and no interest payments, but also leaves you with a $30,000 whole in your balance sheet. Or by changing how we view the problem, we can use our dividend paying whole life policy as collateral and get a loan from the life carrier. We borrow the $30,000. The fact that we have access to $30,000 means that we have already been allocating money towards paying for this policy. That money is going to continue to compound and grow forever and create exponential growth.

Then, we repay that loan, plus interest, over time. What we are left with is a net positive because our original capital has continued to compound and grow over time. We have actually made money. The growth will outweigh the small amount of interest we have paid, and the dividends will further that disparity. All the while you are in complete control of the repayment schedule of that loan.

What you should really strive for is a system where you are in control and you benefit from the function of banking. Your need for financing will exist throughout your life. If you can create a system where your money compounds and grows inside an asset, then you can leverage that asset to finance the things you need in life, you will see your net worth grow exponentially. The only things you will have changed is your mindset and whose system you use to finance your life. Yours or the banks.