May 2009

Issue #11

How to Accelerate Your Wealth Creation -- Become Your Own Bank

The average American is paying from $0.54 to $0.64 of every dollar they earn on interest and taxes (using an average of $0.24 - $0.34 for interest on your loans for home, car, credit cards, etc, and $0.30 for taxes).  That equals 54% to 64% of your total income!

Realizing how much money the typical American is paying out in interest begs the question: Why Not Become Your Own Bank?

It's not as difficult as it sounds.... There exists today a vehicle that's been around a long time (it's not a gimmick) that allows you to create wealth by recapturing the interest that you're currently paying to others. Following is a synopsis that will help you get started. I invite you to contact me with questions or comments.

Understand the Concepts (adapted from the Infinite Banking Concept by R. Nelson Nash at www.infinitebanking.org)

The first basic concept that must be understood is that financing is a process, not a product. Financing involves both the creation and maintenance of a pool of money and its uses.

The second basic concept to increasing your wealth is to understand the power of your cash flow. Everything we buy involves financing. We either pay interest to a lender, or we pay cash and give up interest we could have otherwise earned (also known as "lost opportunity cost").

Therefore, the founding principle of becoming your own bank is that anytime you can cut the payment of interest to others and direct that same market rate of interest to an entity you own and control, and which is subject to minimal taxation, you will significantly improve your wealth generating potential.

Apply the Concepts: Cash Flow Effect of Using an Automobile (illustrative rates and assumptions from IBC by Nash; you can use any numbers here and it would work just as well)

There are five methods of having the use of an auto over the lifetime of a person. Assume your car is replaced every 4 years at a cost of $10,550, financed at 8.5% interest for 48 months, for a total timeframe of 44 years.

1. Lease each year for 44 years. At the end of each 4-year period you have no equity to show for the expenditure.  Over 44 years you will have paid approximately $175,000 for your cars.
2. Finance with a bank. Every 4 years you have a car to trade in.  Over 44 years you will have laid out $137,280 ($260 per month for 528 months).  Your equity will be a used car.
3. Pay cash for a new car every 4 years.  Over 44 years this cost amounts to $116,050 ($10,550 for 11 new cars over 44 years).  You have to defer the use of the first car for 4 years by saving the money for 4 years and immediately start accumulating money again in the same savings account to prepare for the next purchase.  Your equity is a used car and the savings account.
4. Create a pool of money before using it for the car purchases.  Accumulate funds in a savings account monthly over a 7-year period at a rate of $5,000 annually.  At the end of each year buy a CD (at someone else's bank) for $5,000 at a yield of 5.5%.  At the end of 7 years you have $41,071 (after tax).  You can now start self-financing your car purchases by withdrawing $10,550 from the CD.  Continue to fund the savings account monthly ($252.50) and annually withdraw $3,030 from it to buy a new CD each year.  After 44 years you will have cash remaining of $187,229 in CDs.  Remember: you are using someone else's bank and so the bank's dividends are going to the bank's stockholders.  You are earning only the interest that the bank pays you.
5. Use dividend-paying life insurance as a depositary of the necessary capital to create the banking system to finance your autos.  Put the same $5,000 savings per year into life insurance; after 7 years of capitalization, you withdraw dividends in the amount required to pay cash for the car.  Make the annual premium payments of $3,030 to the insurance policies instead of paying a bank / finance company.  After 44 years you will have cash remaining of $551,593 in the policies.  Remember: in the life insurance method the policy owner (you) is earning both interest and dividends.  There are no outside stockholders; you are the owner and you make all the decisions.
   

You now know the essence of the Infinite Banking System -- recovering the interest that one normally pays to some lender and then lending it to others (yourself) so that the policy owner makes what a banking institution does.

The real power of the life insurance method is shown in a comparison of the retirement income that can be realized from each method. Assuming a withdrawal of $50,000 per year from each, the CD account (#4 above) is soon out of money, but the life insurance policy (#5) is still growing and the net death benefit for a beneficiary will exceed $1,000,000!

Economics of Becoming Your Own Bank

There are no free lunches when it comes to the cost of starting a business -- unless someone gives you the starting capital. That is why you have to create the initial pool of money above. In order to issue a CD, a banker has to create a bank. From the start of the idea until it is break-even, it will take the banker a few years to achieve. The same principle applies to life insurance. Each new life policy is a new business. There is a start-up cost in creating a new business. It takes a life company about 13 years to amortize the "cost of acquisition" of a new policy.

The difference between the cash remaining in Methods 4 and 5 above is $364,364 ($551,593 - $187,229). You have just isolated the amount that went to the banker, compounded over the term (44 years) of the investment! There really is no justifiable comparison between the methods.

About Business Mastery with John Lafferty

Every other month, Business Mastery provides financial tools that improve bottom-line results and build business equity.

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