3-6-3 rule

#Economics and Strategy

Ever heard the saying, “Bankers work banker’s hours?” Well, the 3-6-3 rule mental model gives us a humorous peek into what those “banker’s hours” might have looked like back in the day. While seemingly simplistic, understanding this rule offers surprising insights into business models, profit margins, and the changing dynamics of various industries.

1. What is the 3-6-3 Rule? #

The 3-6-3 rule is a tongue-in-cheek description of traditional banking practices. It suggests that banks historically made money by:

Paying 3% interest on deposits: Attracting customers to store their money.
Lending money out at 6% interest: Generating income through loans.
Bankers being on the golf course by 3 PM: Highlighting the perceived profitability and ease of this model, leaving ample time for leisure.

The 3-6-3 rule isn’t derived from a specific scientific theory or economic equation. Instead, it’s more of an anecdotal observation from a time when banking operated in a simpler, less competitive landscape. It’s a glimpse into a perceived era of comfortable profit margins and limited risk.

2. How It Works: The Profitability Equation #

The beauty of the 3-6-3 rule lies in its straightforwardness. Imagine a seesaw. On one side, you have the cost of acquiring funds (3% interest paid to depositors). On the other, you have the revenue generated by lending those funds out (6% interest charged to borrowers). The difference, the 3% spread, represents the bank’s gross profit margin.

This spread, while seemingly small, scales significantly with the volume of money managed. A bank holding millions in deposits and lending it out multiplies that 3% margin into substantial profits.

Think of it like a lemonade stand. Your cost of lemons, sugar, and water (the deposit interest) is lower than the price you charge for a cup of lemonade (the loan interest). The difference is your profit. The more cups you sell (the more loans you make), the more profit you earn.

Of course, in reality, banking is far more complex with factors like operating expenses, risk management, and regulatory compliance. The 3-6-3 rule is a simplified representation, not a comprehensive banking model.

3. Examples of the Model in Action #

While the traditional banking landscape has shifted, the principles behind the 3-6-3 rule can be applied to other areas:

Business: Consider a company manufacturing widgets. They buy raw materials at cost X, convert them into widgets, and sell them at a price significantly higher than X. The margin between the input cost and the selling price reflects a similar principle to the 3-6-3 rule, showcasing how a business can generate profit through value creation. If the difference isn’t high enough or the volume isn’t great, it won’t be profitable.
Investing: A real estate investor might purchase a property for a certain price (the “deposit”), rent it out (the “loan”), and generate rental income. The difference between the property cost (plus expenses) and the rental income is the investor’s profit margin. A good investor will buy properties with good margin.
Consulting: Consultants charge a fee for their services, which is higher than their internal costs (salary, overhead). The difference is their profit. To be profitable, firms must maximize this spread by hiring talent, maximizing billable time and optimizing operations.

4. Common Misunderstandings or Pitfalls #

The biggest pitfall is taking the 3-6-3 rule as a literal representation of modern banking. Interest rates on deposits and loans fluctuate dramatically based on economic conditions, and banks face far more complex regulatory environments and competitive pressures than in the “good old days.”

Another misconception is believing that a large spread automatically guarantees success. A high margin with no volume is pointless. The modern-day reality is not that a good margin guarantees success, rather it is often a necessity for survival in a highly competitive market.

5. How to Apply It in Daily Life #

You can use the 3-6-3 rule as a mental tool for:

Evaluating business opportunities: Ask yourself, “What’s the ‘deposit’ I need to make (investment, effort)? What’s the potential ’loan’ I can make (revenue, value)? Is the spread wide enough to make it worthwhile?”
Assessing personal finances: Consider the interest you’re earning on savings versus the interest you’re paying on debt. Are you maximizing the “spread” to your advantage?
Negotiating deals: Be aware of the costs and benefits involved and strive to create a favorable spread for yourself.

Margin of Safety: This encourages building a buffer into your calculations to account for unforeseen events and potential losses, essentially widening the spread.
Supply and Demand: Influences interest rates (in the banking context) and pricing in general. Knowing how shifts in supply and demand impact the ‘deposit’ and ’loan’ sides of the equation is critical.
Opportunity Cost: Helps you consider alternative uses of your resources and whether the “spread” offered by a particular opportunity is the best use of your time or money.

The 3-6-3 rule, while a relic of a simpler time, provides a valuable framework for understanding profitability, evaluating opportunities, and making sound financial decisions. It’s a reminder that understanding the spread between cost and revenue is a fundamental principle of success, no matter the field. And while you might not be hitting the golf course by 3 PM, understanding this model can help you build a more profitable and rewarding life.

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