I want to discuss a concept that Nelson Nash highlighted in his book Becoming Your Own Banker – Economic Value Added (EVA). This concept, often shrouded in confusion and misconceptions, is crucial for understanding how we can maximize the value of our capital. So, let’s break down what EVA is and why it matters, especially in the context of the Infinite Banking Concept (IBC). At its core, the difference is – are we managing our money or owning our money?
What Is Economic Value Added (EVA)?
The term “Economic Value Added” was popularized in a Fortune magazine article by Sean Tully, published on September 20th, 1993. Although it’s been over 30 years since its publication, the ideas presented are still relevant today. The article focused on how large corporations like Coca-Cola, Quaker Oats, and others used EVA to evaluate the value they were generating from their capital.
But what does this mean for us on an individual level? EVA is not just about profitability—it’s about the value created from the use of capital. This capital can take many forms, including money, time, people, and equipment. The key question is whether you’re getting a proper return on that capital.
The Importance of Viewing Capital as a Shareholder
One of the most intriguing points in the article is the idea that EVA makes managers think and act like shareholders. This is a critical distinction. Are you simply managing your money, or are you a shareholder of your assets?
As a shareholder, you treat your capital differently. If you own $100,000, do you treat it the same way someone managing it for you would? The answer is likely no. As the owner, you want to generate value from every dollar, not just manage it to produce incremental returns. This mindset shift is essential, especially in the IBC world, where the goal is to maximize the value of your capital.
The Cost of Capital: More Than Just Interest
Traditional accounting often overlooks the true cost of capital. When we invest in something, whether it’s real estate, equipment, or a business, we tend to focus only on the interest cost. However, the real question is whether we’re getting a return that justifies the capital investment.
For example, if you invest $100,000 and it costs you 5% interest, are you satisfied with a 6% return? That might seem acceptable, but in reality, you should be aiming for much more. The true cost of your capital includes lost opportunities—what else could you have done with that money if it wasn’t tied up in your current investment?
The Real-World Application of EVA
To illustrate the power of EVA, let’s consider a real-world example from the article: CSX, a major railroad company. At one point, CSX was losing $70 million annually because they had equipment sitting idle, not generating any return. By reassessing the use of their capital—ensuring that every railcar was in use and profitable—they turned that loss into a $70 million gain.
This example highlights the importance of treating your capital with the respect it deserves. Whether you’re investing in real estate, your own business, or even lending to family members, you need to consider the true cost and potential returns.
Embracing the Mindset of EVA
Nelson Nash often said that Infinite Banking is caught, not taught. Understanding EVA requires a similar mindset shift. You need to start viewing your money as a valuable asset that must generate returns, not just cover costs.
This mindset is particularly important in the context of IBC. When you borrow from your policy, are you treating it like your own bank? Are you charging yourself interest and ensuring that your capital is working as hard as possible?
Conclusion: Understanding EVA
The basic premise of EVA is simple: if you understand what’s really happening, you’ll know what to do. My goal is to help you understand the true value of your capital and how to maximize it. If you want to dive deeper into this topic, I encourage you to read the original Fortune article by Sean Tully and to consider how these principles apply to your own financial life.
If you’re ready to have a deeper conversation about EVA, I’m here to help.