I was thinking this past week of ways to save money, and I realized lately how “odd” my primary strategy seems to other people. I’m in the process of paying off my credit cards, so when I need to make a large purchase I give myself *a self-funded line of credit*.

Basically, I give myself a loan. A loan that I pay back. Think of it as my checking account taking out a credit card from the Bank of My Savings Account. I make monthly payments, charge myself interest, and actually *make* money on my purchases.

Think about that. **I make money when I buy things!**

Here’s a simplified example of how it works:

## A Typical Model

Mark wants to buy a new computer. He takes a look at his finances – there’s $50 in checking and $2000 in savings. Based on his income, he can afford payments of $100/month on the new machine without having to scrape by too much. But he doesn’t want to give *everything* away, so he uses his Visa to buy the computer. He now has $50 in checking, $2000 in savings, and owes $2000 on his Visa.

Let’s assume the Visa accrues interest at 12% APR and the saving account makes 2% in interest. Using those numbers, it will take 24 months (2 years) to pay off the credit card entirely if Mark pays $100 each month. But thanks to compound interest, Mark has paid a total of $2,242 over the two years (remember those annoying finance charges?).

Mark’s $2000 computer ended up costing him $2,242. But that’s OK! After two years he still has a fancy new laptop and his savings account (thanks to 2% interest) now has $2,078 in it. Not too bad!

## My Atypical Model

Judy also wants to buy a new computer. She takes a look at her finances and, like Mark, has $50 in checking and $2000 in savings. She figures out that a $100/month payment will be affordable on her salary without breaking the bank. She’s a savvy spender, so rather than taking out a loan from someone else or borrow against a credit card, she issues herself a *self-funded line of credit* against her savings account.

Let’s assume that Judy charges herself 12% APR on the line of credit and her savings account makes 2% in interest. Using those numbers, it takes 24 months to pay off her line of credit paying $100 each month. Just like Mark, Judy will pay a total of $2,242 over the two years (remember, she’s charging herself interest on the line of credit), but all of that is put into her savings *where it earns additional interest at 2%!*

Judy’s $2000 computer ended up costing her $2000 because she didn’t borrow money from anyone else. After two years, she has a fancy new laptop, and her savings account (thanks to the 12% financing and 2% interest) now has $2,284 in it.

## See the difference?

Both people start out in the same boat – they want to spend $2000. Mark, by borrowing from someone else, pays that person finance charges. He’s made $78 in interest on his savings, but paid an extra $242 in finance charges on the loan. In the end, he’s **lost $164** by using a credit card to make the purchase.

Judy, by borrowing money from herself, pays herself the finance charges. She’s made a total of $284 on her savings, and hasn’t paid anything extra to anyone else. In the end, she’s **made $284** by using a self-funded line of credit to make the purchase.

Which would you rather do? Buy a computer and lose money? Or buy a computer and **make money?**

If both Mark and Judy have more than $2000 in savings, they will earn more interest. Assuming they both have $12,000 in savings but still follow the above plan to buy $2000 computers, Mark will end up having

earned$247 after you deduct finance payments from his earned interest. Judy will have earned $696 in interest and will have paid nothing in finance charges. Even taking additional savings into account, Judy ends up almost $450 richer than Mark when everything is said and done.

You know, I have actually employed the self-loan concept, though not with the stringency of due date, and certainly not with a finance charge – that part is GENIUS!