Albert Einstein was right to call compound interest the eighth wonder of the world. Like the atom, it can accomplish powerful things. Two things are true about compound interest: It works best:
- Over time, and
- If you leave it alone.
The concept of the interest earning interest on interest earning interest is the simple reason why the rich get richer. It’s an immutable law of finance.
If you stop and think about it, whether we know it or not, we finance everything we buy. “But wait a minute,” you say, “I pay cash for everything I own.” Really? The cash you pay could be earning interest if you had kept it, couldn’t it?
So, by forfeiting that potential interest, you essentially financed it, right? If you paid cash, you have to make payments to yourself to get back to where you were before you made the purchase.
Acting as Your own Bank
The Infinite Banking Concept ® is a concept that is rapidly growing in popularity among those whose goal is to create wealth for themselves, rather than create more wealth for the lending institutions. The concept was developed by Nelson Nash, who is also the author of Becoming Your Own Banker.
The intent of this concept is to provide foundational financial wisdom that will help consumers understand personal finance and partially recover the interest they needlessly give to financial institutions – and on a tax-free basis! Once cash value has been established in a life insurance instrument, such as the one used by the Infinite Banking Concept ® , the interest you pay yourself back is plowed right back into your account and continues to grow compounded.
Once people understand the wealth-building power behind this concept, they sometimes ask why someone didn’t come up with the idea sooner. Nash makes the observation that the underlying contract of a whole life dividend paying life insurance policy has not fundamentally changed in over 100 years.
“This contract is central to the entire system,” says Nash. “So, the concept of how to convert that contract into a tax-advantaged vehicle with similar transactional mechanics of the banking process is what has been developed.”
Nash adds that the Infinite Banking Concept®
is not a “get rich quick” concept.
Rather, it is a program that requires a commitment of long-term discipline to save. Even Nash acknowledges that it is a major paradigm shift for most folks.
It may require a few sessions with a financial professional who is fully trained in the concept and is able to explain it thoroughly. But, once understood, the idea can save the farsighted consumer thousands, if not hundreds of thousands, of dollars.
The Private Reserve Strategy™ is another concept that gives us a new way to look at how money works.
Developed by insurance industry spokesman and software creator Don Blanton, the strategy is designed to teach people how to avoid, what Blanton calls, “unnecessary wealth transfers” and accumulate an increasing pool of capital that you can access and control.
What type of account should you use for your private reserve strategy?
The idea is to use an account that offers you the greatest number of benefits and where your money is available to you through collateralization. Optimally, the account would incorporate the following benefits:
- Tax deferred growth. Compounding interest in a taxable account, such as a CD or a regular savings account, is not going to serve you well.
- Tax free distribution. To be able to get the money out without having to pay taxes on it would be awesome!
- Competitive rate of return. During the accumulation phase you want the interest to be as high as possible.
- High Contributions. Some accounts come with contribution limits. You want to be able to put as much as you wish into the account.
- Deductible contributions. This would be highly preferred.
- Collateral opportunities. This is key for the private-banker strategy to work. Otherwise, how will you be able to leverage the two accounts?
- Safe Harbor. You want the money in the account to be safe.
- No-loss provisions. You want to be immune from losses.
- Guaranteed loan options. If you are going to collateralize loans from time to time, you’re going to be able to do it at your discretion with guaranteed access.
- Unstructured loan payments. This would be preferred. You do want to pay the money back, but you are not under any obligation to do so under a set and rigid schedule, thus eliminating the pressure of forced payments.
- Liquidity, use and control. You will want liquidity, use and control of the money at all times.
- Additional benefits. It would be nice to have your account protected in case of a lawsuit or an attack by creditors.
So where can you find an account like that? You certainly won’t find it advertised by your local bank. That would be tantamount to the oil industry advertising solar power.
There are perhaps several accounts that will enable you to leverage compounding interest against an amortized loan, but none that I know of that will provide you with all the attributes listed above in quite the way life insurance will.
However, you must know that I’m not talking about life insurance as you probably have always thought it to be – a payment to a beneficiary when someone dies.
This is a concept that uses the tax advantages life insurance enjoys, courtesy of Uncle Sam and the IRS, and the cash growth features that only life insurance can legally provide.
To fully understand the value of the Banking Concept® or The Private Reserve Strategy ™ may require stretching the parameters of your thinking a bit, or as the popular saying goes, “thinking outside the box.”
The kind of life insurance the concept uses is not the typical term life policy or traditional whole life policy, but a high cash value type of policy designed especially for this purpose.
This kind of life insurance is probably the least understood of all the financial tools we have at our disposal.
Research shows that the growth potential of cash value in these instruments is between 4.5% and 6.5% over a 28-year period. Terms are flexible. You can put as much or as little into your personal bank as you want. The growth is guaranteed and is not subject to market fluctuations.
These accounts also have liquidity. The money is yours, after all. You should be able to use it any time you wish. In a traditional loan, you have to prove that you are able to pay the lending institution back. This involves credit checks and income verification.
Since you are using your own money to collateralize the loan, none of that is required. A life insurance policy has no restrictions in that regard. It’s as simple as telling the insurance company how much you want to borrow.
Reading about this makes it sound more complicated than it has to be, which is why I like to explain these types of concepts to my clients personally. This also allows me to apply it directly to his or her personal situation, so we can see how it can work in their overall retirement plan.
I write blogs like this sort of as a “prerequisite,” if you will. I like to provide people with a solid foundation with which to begin, so they are one step ahead of the game when I speak to them.
Give me a call at 1-352-561-4571. Or, to make things even easier, you can schedule yourself right on my calendar in less than 30 seconds; just click the yellow button to the right that says, “schedule strategy session”!