Pay yourself with interest or Bank on Yourself. What does that even mean? The idea behind paying yourself with interest is just that – you pay yourself back with interest. In short, you are the bank and you loan yourself money (will explain how below).
Bank on yourself means the same thing, you are the banker. You are the bank. In no way shape or form am I telling you to cash in your 401K plan. Or am I telling you to try to learn how to use your life insurance for this method of banking on yourself. I disagree completely with those ideas. Especially for those of us who do not have the means to handle such tricky sophisticated methods. Besides taking money out of your 401k plan is counterproductive and comes with high fees. (I don’t like fees.)
Pay yourself with interest or Bank on Yourself
I am going to use my own personal experience as the best way to teach this. Why? Well, because it happened just the other day. By sharing this I can do away with the notion that this can’t be done by just anyone. If I can do it so can you.
The first thing you need to do is have an emergency fund. In several of my other articles I write about the importance of having emergency funds. Any financial advisor worth his/her salt will advise their client to build an emergency fund. Most emergency funds cover things like the loss of income (you should have 6 to 12 months of your income saved up) just in case it takes a while to find a new job.
This emergency fund can be for when things break down say like my dryer.
While I was happily mowing my lawn in the hot morning sun sweating like a pig in a roast (colorful image for fun) my wife flags me down and trust me when I say this – she seemed to be holding back her joy and excitement. Right away I knew something was wrong and I prepared myself for the worst.
Of course when she told me that the dryer had broken down in the middle of doing the laundry I was calm about it. You see, this time, during this emergency I was prepared. I looked over the dryer (like as if I even had a clue to fix it) and I came to the conclusion that it would be best not to replace the dryer (wife not having it). After a brief exchange of words, I took a shower, got dressed and took my wife to Lowes (yeah I folded).
Pay yourself with interest
While I was driving up into town I was trying to calculate how much reserves I had. The easy thing to do was to put it on the credit card but I wasn’t sure if with all the things (financially) I had going on, if my credit limit or my budget could take the hit. Of course I wasn’t too happy about dipping into my emergency fund. I had already touched it last month to help my daughter out (college books, first month’s rent – you know).
That is when I figured I could just loan myself the money. I was going to have to put the money back, replace and replenish my emergency fund. Why not just pay yourself with interest or just Bank on Yourself? Personally I thought it was a stroke of genius (not). I learned it from a high profile financial planner and it dawned on me this is what rich people do. People with money find ways to keep more of their money. So why not loan myself the money and pay myself back the loan with interest?
Step one: Make sure it is a real emergency. Can the dryer be fixed? If not be certain to look for a deal (unlike my wife who wanted to purchase a $1,000 dryer – not happening). If you can fulfill these two step adequately then use your emergency funds to purchase the necessary item.
Step two: How do pay yourself with interest or bank on yourself? Why ask this question? Because this is where you have to know what kind of person you are. Can you be the banker? Will you be willing to pay yourself back as if it was a real bank loan you were dealing with?
Believe it or not this is important. Too many people skip out on paying family back because well, their family. How much easier is it for you to decide, I don’t have to pay myself this month. It is so easy that I decided to automate it just like everything else I have done with in my finances.
I sat down and calculated how many months I wanted to take to pay myself back. I then calculated how much interest I was willing to pay (just like if I were paying back a loan or credit card). After figuring that all out I moved on to my next step.
Step three: I open my online checking account and I set up transfers from my regular account into my emergency fund account. Like clockwork, with no more effort on my part a set amount of money will be transferred into my emergency fun. I am the banker. I am paying myself with interest. The bank will not get the interest, the credit card company will not get the interest and by interest I mean my money.
Sure it can be a little disconcerting seeing my emergency fund lacking some funds, but that is what it was created for. So I used it. I have to replenish it so why not treat it as a loan and pay myself back with interest?
Pay yourself with interest or Bank on Yourself
So if I break it down by the numbers:
1. I purchased a Dryer for $568 (my wife loves me – for about two whole minutes and then tries to get me to purchase more stuff… )
2. Borrow the money form myself charging myself interest (you decide how much to charge. You use the average credit card rates if you want – just make it worth it).
3. I set up minimum payments every two weeks that automatically go into my emergency fund.
4. When I pay myself back with interest: I would have spent $568 and paid back an estimate of almost $700 dollars.
So by being the bank, I bank on myself (loan myself the money) and then I as the borrow “proceed to pay yourself back with interest”.
I am sure some are thinking that there wasn’t much profit in it so why go through all the trouble. Because I would prefer to keep my money than to give it away. Making fifty to one hundred dollars extra may not sound like a lot but its mine – all mine and is not lining the pockets of the bank.