It seems like a foreign idea to pay interest for the use of money when you could pay cash.
Why would I ever do that?
It’s my money and I can use it how I see fit.
No doubt you have the choice to spend your money how you like and treat it as a loan you wish to pay back to yourself or just as cash that comes and goes. While I think it is apparent that treating your own money as if it has value when not spent makes sense (money can earn interest), it is still something that is hard to hop on board with and practice.
The goal of this piece is to provide answers as to why we teach clients to do this when they implement the Infinite Banking Concept.
Remember why you started practicing the Infinite Banking Concept.
What is the problem we are solving for?
The massive need for finance in our lives. It is so obvious how great this need is, yet we don’t pay any attention to it because it’s not talked about. It is just seen as common and the correct way of conducting one’s affairs to be reliant on others when we need capital.
Just consider how often we go to third parties for money with this list of financed items: vehicle loans, home loans, land loans, operating loans, equipment loans, student loans, credit cards and so on.
The entire thought of saving is discounted and we’re told to invest by giving up control of our money to others and subjecting it to volatility and the risk of loss as the right thing to do.
Are you comfortable with this?
The simple idea that being able to control your need for financing (the thought of control in your financial life and not being dependent on traditional banks, really think about that) the things you were already going to purchase in life and play honest banker with yourself is all the Infinite Banking Concept is. With this system you can begin to recapture some of this interest being lost to third parties.
What Nelson discovered happens with the cashflow of the “All American Family.”
If you have read Becoming Your Own Banker you know that Nelson focuses on the problem with our thinking in the beginning of the book.
He also conducted a study looking at where our money goes after taxes. This revealed that 34.5 cents of every dollar left after paying taxes was leaving our personal economy to pay interest to a third-party lender.
What does that mean?
WE ARE NOT talking about rates here. What Nelson found was that by VOLUME 34.5 cents of every dollar left in our economy after taxes goes to pay interest associated with financing the things we already buy in life. That’s just the finance charge and does not include the principal balance which you have to pay for too.
So, imagine a coffee can. This coffee can holds your entire year’s wages after taxes and is filled right to the top. Now cut the top 1/3 of the can off and give it to me. You’re left with only the bottom 2/3 because I financed everything you were going to buy anyway this year (the top 1/3 is the interest you owe me). You didn’t create a system to perform the banking function in your life so money is always escaping.
That is how much Nelson found was leaving the average person’s economy.
That might be true for some people but not me.
Let me try to further illustrate his point.
Look at a $200,000 30-year home mortgage with an interest rate of 3.5% paid off in 30 years. (This is the mortgage itself only. I did not add in closing costs, insurance or a down payment.)
- Total principal paid at the end of 30 years $200,000
- Total interest paid at the end of 30 years $123,311.97
- The interest is over 38% of the volume of money paid on the mortgage, if you pay it off and don’t refinance.
- After 10 years you’ve paid $107,770.80 toward the mortgage but $62,624.44 went to interest. That is over 58% by volume! If you move before paying off the mortgage, the 38% will be much bigger!!! You can also add in more closing costs which I didn’t even account for here.
This massive amount of interest leaving your economy is exactly what Nelson is talking about!
For those of you who are thinking, “well that’s why I got a 15-year mortgage.” We’re still talking about over 22% by volume. The lack of saving money in a liquid place (paying high premiums into properly designed dividend paying whole life insurance issued by a mutual company) to control the banking function in our own lives is the problem.
Here is 1 more example.
Do you pay your auto insurance monthly or annually?
My own auto insurance is approximately 12% higher if paid monthly instead of semiannually.
A graphical illustration of the problem.
Okay you’re starting to see what I mean about interest leaving your economy and going to someone else’s system.
I’ve also been trying to address the problem with the rate at which we save. Here is a graph for you to see what I mean.
This graph shows the personal savings rate of the United States citizens from 1960 to June 2020. As you can see, we only crossed the 10% mark 1 time since December of 1992 until recently. This is why we are in constant need of money from third parties and it leads to a perpetual cycle that you don’t get out of.
Now for the big reveal.
What does it look like in a chart if you compare the volume of interest we lose in our personal economy after taxes have been paid to what we save on average?
*Remember we are talking about VOLUME in this chart!
I think I was more than generous enough saying on average Americans save 8% if you look at the graph. This 8% is exactly where every financial advisor is going to tell you to focus your attention. They will fight over earning a 6, 7,8, 10 or 12 % rate of return on this small amount of money saved.
LOOK AT THE GRAPH AND YOUR OWN PERSONAL FINANCES THOUGH.
Wouldn’t it make a lot more sense to create a system to control the banking function in your life?
You’re already sending 34.5 cents of every dollar to someone else’s system.
Why not change the flow of money and send this to an entity that you control?
That is far more powerful than earning whatever the financial advisor tells you that you will receive. I should also inform you that in the Dalbar 2020 Quantitative Analysis of investor behavior, the typical investor in equity mutual funds has earned 4.25% annually for the past 20 years (ending 2019). Some of you will likely do better than this but it’s something to keep in mind when you hear these terrific ROR’s being presented.
Please don’t mistake me for saying you can’t earn enough to make it worth investing. I believe you certainly can after you educate yourself! Investing in something you know and understand also greatly reduces the risk of investing.
“It’s the investor who is risky, not the investment.” –Robert Kiyoskai
Infinite banking is about who is the banker in your life!
It’s easy to get caught up in interest rates. If this is where the conversation ends up while discussing the IBC there is more to learn.
When we discuss infinite banking, we are addressing the fact that someone is going to perform the banking function in your life and profit from doing so (recall the volume of interest you sent me from your yearly earnings that was in the coffee can). I contend that that person might as well be you.
You have to finance every single thing you buy from candy bars and milk, to taxes, home purchases, business and investment.
By controlling the banking function and being the banker in your life you get to control the cashflows and send money back to a system you control (just remember you won’t be able to handle everything all at once, it will take time to build a large enough system). Every dollar that goes back to the system to pay off a loan (principal and interest), increases the available money in the pool dollar for dollar and is working for you (in the life insurance policy) until you need it again.
Remember, even investments have to be financed! Real estate is something that many people understand. It is unlikely that you can afford to purchase say an 8-unit apartment complex just starting out. So often times you come up with a 25% down payment and get the other 75% from a bank.
Now why did you purchase this apartment building?
Most people are looking for cashflow and appreciation in price.
If you held onto this investment for say 10 years, you could be using the cashflow to pay back your infinite banking style system (for your 25% down payment), and every dollar that you repay on the loan is instantly available to be loaned out again. The policy is just a storage tank for your money.
After 10 years you sell the apartment building investment. If things went as planned and the building appreciated and you payed down your loan with the bank, you are going to have a pile of cash sitting around.
What are you going to do with it?
If your existing policy has any room you should put it in there (pay off loans, max out premium payments and potentially backfill the policy if the company allows), but likely you won’t have enough room. This means you start another policy! Your money is then sitting in your personal infinite banking style system working for you until YOU DECIDE you need it for the next investment.
All this has done is create a bigger pool of cash values from which you can borrow from to control more of the banking function in your life. When you control more of the banking function you send more of the 34.5 cents back to an entity you control instead of to me.
Finally, always remember banking is just the movement of money. It isn’t a building or a product. You just need a place where you can deposit, borrow, repay, and withdraw to perform the banking function.
Here is what borrowing and repaying from an infinite banking style system could look like for you using policy loans.
Compound vs. Amortized Interest
Compound Interest Earning 4%
Amortized Interest at 5%
End of year Balance
End of Year Balance
This table demonstrates how using a policy loan is the ideal way to access your funds, rather than paying cash.
You have $50,000 of cash value in your policy and have quit funding it for the sake of simplicity. You decide to take a policy loan for the full $50,000 at 5% interest to make a down payment on a rental property, and will pay yourself back over a 10-year period.
Over that 10-year period you pay $13,639.21 to the insurance company in the form of interest. Since your money stayed in the policy and compounded without interruption at 4%, the cash value grew from $50,000 to $74,012.21, which is a $24,012.21 gain.
If you take that $24,012.21 gain and deduct the interest you had to pay to the insurance company ($24,012.21-$13,639.21), you actually had a net gain of $10,373.00. All $24,012.21 is yours though, you recaptured the lost opportunity cost (in this case $13,639.21)! This is the power of properly structured, dividend paying whole life insurance!
How did this work?
You capitalized (paid premium) into a system that you control (IBC policy) which allows all your money to stay at work for you while you leverage it. Capitalizing the system is the first and most important step, which many people have trouble learning.
For simplicity we used structured payments back to the insurance company for the loan to illustrate what happens. However, these terms are controlled by you, and as long as you have enough CV to cover the interest accruing on your loan, you decide when and how much to pay back on your loan, or if you pay it back at all. The banker is you, and there is no outside institution calling you for a payment.
Now that’s control!
Quit focusing on the rate of return.
To understand the Infinite Banking Concept, you have to be able to distinguish between good information and financial noise. This will take some studying on your part.
The very first thing you are going to need to block out is the rate of return that everyone gets caught up in. Infinite banking is about being the banker in your life. Everything you buy has to be financed and you can’t receive a “higher rate of return” by ignoring the banking function. Go to page 69 of Becoming Your Own Banker for more detail on this.
If someone tells you that infinite banking or dividend paying whole life insurance is bad, ask them why. The majority of people don’t understand you aren’t focusing on a rate of return, you are creating a system to perform the banking function in your life.
To close, what I’m saying is we aren’t comparing a dividend paying whole life insurance policy to stocks, or real estate or business. We are just solving for how to finance all the things you were already going to buy anyways (assets and liabilities, investments and everyday expenses).
Once you see this, the clarity and simplicity behind infinite banking and needing to pay yourself back with interest comes into focus!