Here is Marcin with the second entry on the blog.
I have been thinking for a long time about what I should mention at the beginning. What would I write if it was the only entry about getting rich? What has been the greatest truth that I discovered in my life? For such topics one entry is not enough. One of the greatest discoveries in the area of finances for me is the understanding what the contemporary loan is and why it is so toxic and how it drives our world downwards.
Siblings in business
Let my story be an example for you. As I wrote before, around 2005 together with my siblings we opened one of the first online grocery stores in Poland. The project was developing quite slowly for about 1.5 year before we delivered our first order. We had much to learn about logistics, writing the program, developing operational procedures, creating the marketing and many other details such as rent, delivery car etc.
Where did we have the time and money from? We managed to multiply my money on the stock exchange (you’ll read about it soon). As it turned out later on, the end of the economic boom in the world was approaching, and soon there was a crash on the property market in the USA.
Having money from the stock market, we were able to start a shop and run operational activity. As I was a good customer of one of very innovative banks, I was quickly offered a revolving loan, a loan in cash and a credit card. The polite seller assured me that this was a good idea because I had the possibility to count interest as tax cost, so I would pay less tax and this is one of the rules of a rich father.
I recalled the tips of a mythic rich father created by Kiyosaki about using the financial leverage. Thanks to additional cash I was able to buy e.g. goods from suppliers and be less dependent on customers’ payments. However, my loving Father was discouraging me from taking out a loan as a tool for business development. As you are probably guessing, I was young and deafened by a dream of a businessman from the book “Rich Dad Poor Dad” so I chose to take the loans. I thought “I will take out a loan and the business will pay it off in a year or two.”
Surprises in business
However, there were more and more clouds gathering above my head from the beginning of 2008. It turned out that I needed more capital than I had and the business was bleeding quite extensively and the alchemy of the stock market stopped working and slowly all shares fell below their initial value. It demanded using more resources from the loan so that the company could continue functioning.
Around May 2008 I was called to the tax office because of unpaid tax on capital profit in an amount that meant the end of the company. The situation was so paradoxical that the business activity showed a greater loss than profit from the stock market. However, the hungry state apparatus turned out to be merciless and had to consummate the payment even though it meant the bankruptcy of the company and losing jobs by many people. The lady from the tax office claimed that it was not her problem and that she was only doing her job. My requests for mercy ended that the kind tax machine divided the execution into three convenient installments but all installments were deadly for the company.
After perturbations with the tax office July 2008 turned out to be the last month that we had enough means for functioning. After tax execution there was nothing left on the account. I had to suspend operations and start the process of getting out on the surface, out of taxes and debt. The situation was painful because that was just the time when the business was slowly coming out of trouble, we needed about 2000 PLN more per month in order to stop bleeding.
Emergency exit of the damaged vehicle
Then it dawned on me that I wouldn’t manage to pay off the loan as quickly as I had planned. Instead of expected two years it took me whole eight years. Can you remember what I wrote about the conversation with the bank employee who sold me the loan? “You will have costs, you will pay less to the tax office, that’s quite a smart solution”. However, the winner in this business turned out to be the bank and the tax office. Why? Here’s the explanation.
Nowadays banks don’t have any money but they sell the possibility to make money in the form of loans. Although the bank doesn’t have any money, but it only creates money, it still joyfully charges margin, insurance and interest. So the bank earns money in a way that although it doesn’t have any money it can create it and receive even more money out of it. Isn’t it suspicious?
Let’s come back to the loan borrower who because of lack of resources for, let’s say, the costs of running the business (although the purpose is not important) goes to the bank for a loan in order to be able to buy necessary products, hire people, machines etc. When he does it all and starts producing goods or providing services then other people start to pay him for the performed work. The borrower must work hard on it, often by working long hours and resigning from pleasures so that the goods can be produced and sold with such a profit that allows the business to continue. Some of the profit is taken by bank in interest, margin or insurance – just like the tax office does. When at the end of the month there is something left in your pocket, and there are no greater perturbances, then the borrower for many years (often 10 years and more) pays off the debt and interest and everything ends happily. But in this case only the borrower does the work and bears all the risks. Why?
I will explain how lucrative running a bank is. What happens if the borrower has trouble and cannot generate the enough profit required by the bank? He is rewarded with penal interest and extension of payment which means even greater interest. So the bank receives its money and interest whether we make it or not. The bank even prefers it if we get tired and go a bit down because then we will work for repayment longer – such a situation allows to suck as much money out of us as possible that is why all loan advisors encourage us to hide some costs so that we are even more creditworthy.
How does a loan always end for the bank? Of course with a great profit – no matter whether the borrower makes it or not – counted on the money that the bank never had. What’s worse, the bank doesn’t perform any work for which it charges money and at the end of the day receives all hard-worked money from the borrower (real money because it resulted from work) and additionally a significant part of the profit that the borrower worked upon in his business or permanent job.
The borrower always risks it all. Starting with a potential loss of property, cars and ending with performing hard work (even more than 10 hours a day). The borrower, pressed by the burden of interest, agrees on deterioration of health, limiting time spent with children, families and finally losing everything if the penal interest is too large to pay off and the bailiff comes to take properties, furniture and cars. What’s worse, often even if you give the bailiff all your properties it may not be enough to cover the debt.
In my case, I was planning to take the loan for 1-2 years but because of a crash on the property market (totally not related to my branch of business), it turned out that I was forced to pay off the interest for 8 years – the bank earned thanks to my stumble additional 6 years of loan. And what if it was a loan for 20-40 years?
So what can be the bank compared to? I will leave the question open.
And at this point I would like to end this one of the first posts on your way to getting rich. I will not go the way for you but I will do as much as I can to show you potential dangers that I have encountered.
From today I on, I work for you every day in order to expose the traps placed on your path to Riches. There is an incredible adventure waiting for you because there are many “magical” tricks that we are served in all media, commercials, developed and perfected by masters of illusion.
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