Let’s profit out of other people’s misery …

Without money
Without money (Photo credit: Toban Black)

What if you stood to gain a massive return on your money by lending it to people prepared to pay insane interest rates? Let’s say you had £15,000 sitting in a savings account earning £450 per year in interest (minus all the bank charges and tax) and along comes someone who is prepared to give you £5,000 to borrow that money for just 4 weeks?

 The £450 you’re making on it now is probably the best offer you’re going to get on the high street these days — so the £5,000 offer is EXTRAORDINARY.

Who would pay this much money to borrow your cash? People who can’t otherwise get a bank loan, that’s who!

Some are running cash-starved businesses that will go under if they can’t get what we call a “bridging loan” to make ends meet. Plenty of these businesses deserve to survive — they’ve got a great product or service and the team behind it has given it their all to make it work … but cashflow (as opposed to profit per se) is the #1 small business killer. Not whether the business is a good idea or the team behind it strong. This is especially so these days when many more businessses have cashflow problems and are slow to pay their invoices …. This damages businesses all along the supply chain that connects companies to each other. We live in an interdependent world — as the collapse of Europe is nicely demonstrating.

There are also other people out there ready to sign the dotted line on crazy loan terms because they’re either scamming around in an underworld of very dubious dealings or they’re in serious personal trouble and will suffer immensely to pay you back the loan.

Now, bearing in mind that if you don’t lend the money, other people will, what would you do? If you had the £15,000 and weren’t wealthy enough to laugh off £5,000?

This was the subject of debate amongst a group of friends a couple of weeks ago and I can tell you that it got HEATED.

I left the evening not knowing what I would do but needing to … it’s one of the options on the table for me this year and I’m not convinced I wouldn’t do it — under the right circumstances.

And so my friends have encouraged me to launch the £15,000 question to work out all the things one might do with this sum of money in order to make it grow. It’s not enough to buy property (though in some places in the world it’s enough for a deposit) and yet it is too much money to leave lying around in a savings scheme that isn’t worth the time it took to set up the account.

For me (and I imagine most people reading this blog) this is a significant sum, but is it enough to get the attention of the advisors most talented at maximizing personal wealth?  Not really …. They’re too busy with the super-rich.

Yes, I know — it’s all relative…

 There’s that expression about how the rich worry what to do with their money and the poor worry about how to get through the week.

But being rich enough to have this problem, it is a worry unless I want to work for a wage until I am 104 years old. And so for the rest of the year I’ll be asking anyone and everyone “What would you do if you had £15,000 and couldn’t afford to give it away or spend it and needed to save and invest it?” 

So far I’ve received the following answers

  • “Become an angel investor in a start-up business”
  • “Throw it into the same savings account I already have, the idea is security not high-risk profit”
  • “This is the reason I have a husband. I have no idea”
  • “Use it towards property”
  • “Lend it to that guy who’s promised to pay back £20,000 in 4 weeks time!”

These answers reflect both individual tolerance for risk and the degree to which one can afford to lose some, or indeed all of the £15,000 in exchange for the possibility of significantly growing it.

I mention all this today because this week’s assignment was to make a bold financial move. So while I might take the rest of the year to make either a bold or a conservative decision about the £15,000, The Deck of Small Change dictates that I make a bold decision about a financial matter RIGHT NOW.

So I’m going to sell my flat.

That’s what I decided this week.

I’ll cover my rationale for that and why it counts as a fairly bold move for me in the weeks ahead.

Till tomorrow and next week’s assignment…

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4 thoughts on “Let’s profit out of other people’s misery …

  1. I’m familiar with this problem, as I am able to live within my income and save amounts of money that are big enough for me to want to do something constructive, without being of world-changing or remotely interesting to the investment professionals. What I’ve done so far has been to set up an offset mortgage (One Account) so that when I do have extra money it goes straight towards my mortgage. There are downsides to this (your house is on the line if you go nuts, buy a ferrari and don’t keep up the payments) and it’s not for everyone. But it’s been good for me. I’m interested to see how to deal with this once I’ve actually finished paying for somewhere to live.

    I don’t lend it to people who will pay back outrageous interest because I don’t know any well enough.

    1. Yes – it’s a problem that would never have occurred to me pre Zeros. I’ve been wondering about my mortgage and whether paying in more (which am set up to do with mine as well) is the right way to go. Am sure there’s an equation somewhere that would help me work out whether that’s the best place to put savings. Of course it’s different when your mortgage is attached to a buy you plan to call home …. Then I can see how attractive it is to own it outright.

  2. Interesting discussion.

    If you have no real attachment emotionally to the money and can afford to lose it then certainly the proposition may be a reality, however not very smart. I am familiar with money that comes with such a return and usually it involves violance and intimidation.

    For most people, finding a return of 33% for a 4 werk term is impossible, even the best financial professionals in the word would find it hard to acieve 10% over the same period. At that, they would be trading complex derivatives that could show a downside greater than than the original $15,000

    I’m a commercial banker and lend to small and medium size business. If the business doesn’t cash flow then my risk is too high and I walk away. I don’t charge aggressive rates to qualified business’s, normally under 6%. From a bankers point of view it would be impossible to lend to a company which you describe.

    A company on the verge of bankruptcy can only be a viable investment if the sum of all parts of its assets are greater than the investment, after failure. And only when contractual agreements are in place that you can take procession of the assets.

    What your really describing is a short term bet, not a calculated risk. If you study horse racing and its “form” you do have the opportunity to make some very rational decisions based on statistical information, however it is still a bet with high odds.

    If I had a mortgage and I could pay down an extra $15K it could potentialy save me $25K over the term of the loan. To me that’s important as I want the freedom of not having any debt one day. I can take equity from my home at under 3%. I would rather use equity money and invest in a high yield return of 7% with moderate risk.

    It’s really all about your appetitive and tolerance for risk.

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