The Private Reserve Strategy

The Private Reserve Strategy, or the banking concept, illustrates three fundamental differences in how we handle major capital purchases, or a purchase that cannot be paid for, in full, from your monthly cash flow. The way you handle these major purchases can result in a variety of future outcomes.

The Debtor
When the debtor needs to make a major capital purchase, he leverages his future earnings to pay for the purchase now. He is always in debt to someone else and never earns interest and never saves dollars. He constantly falls below a zero balance and works constantly to pay back his debts and get back to a zero balance. Not only does this individual lose interest, but also loses the opportunity for those lost dollars interest dollars to earn future interest.

The Saver
The Saver handles his finances a little bit differently. He too makes a payment, a payment to himself, in order to save for his major capital purchase. He avoids paying interest, but every time he makes a purchase he drains his savings- setting him back to zero. His strategy is defensive, and he never takes advantage of compound growth.

The Wealth Creator

I would like to introduce you to the Wealth Creator. The Wealth Creator realizes the value of compound interest and never wants to set himself back to a zero balance. Just like the saver, the wealth creator saves money into his own account for those major capital purchases. We will call this account his private reserve. Unlike the saver, the wealth creator knows that if he empties his private reserve he will start back at zero, so he utilizes other people’s money to continue to employ the benefits of compound growth. He collateralizes that reserve to access capital for his purchase. By doing so, he knows that the compound growth will always increase his reserve substantially more than the interest expense on the money borrowed. His money never stops compounding, and he guarantees himself a substantial amount of money in the future, while providing the money necessary for his major capital purchases today. He creates far more value than the Saver and The Debtor.