və-ˈlä-sə-tē – (economics) the speed of money changing hands; the rate by which money moves.
Most of the critics of infinite banking are simply missing the entire point. But we’ll get to that later…
Infinite banking is NOT a new concept and really has nothing to do with cash value life insurance or any other particular financial asset with the exception of one primary factor:
While you sleep, around the world, every minute of the day, infinite banking is already happening “under the radar”.
Fractional Reserve Banking
You see, all banks already use the infinite banking concept® to lend out vast sums of money continually taking advantage of what is called the fractional reserve banking system.
Bankers do this because they have a certain understanding of money (what it is and does) that is NOT shared by the masses.
If most people understood money with the insight of the big bankers, they would think about their money very differently. The vast majority of the population; however, has been deliberately sold a set of beliefs by smart bankers and wall street players and most continue to behave like a flock of well fed sheep.
Do I have your attention? Good. Please read on.
The OPM Principle
Banks DO NOT lend with their own money. Let me repeat that another way. The banks follow the OPM principle and use Other People’s Money (YOUR money), which they’re borrowing from you for next to nothing BECAUSE THEY CAN. The banks get your money and then turn around and make loans to others at rates of 5%, 13%, 23% and on up.
The amount that the banks need to have on deposit is called their reserve requirement.
Do you think the banks need a dollar for dollar reserve?
If so, slap yourself now for being naive.
The banks play BIG and don’t let things like not having enough greenbacks slow them down. For every dollar that a bank has on deposit, they can loan several times that, maybe 8, 10 times that money, depending on what the fractional reserve system is currently doing.
The Velocity of Money and Infinite Banking
The Velocity of Money is a term that every banker knows and most of the masses have never heard. This concepts refers to the banker’s understanding that money cannot stay stagnant AND the faster money moves, the more profits are made.
You could think of it as turning your money.
You see, banks don’t let money just sit around. Yet, they interestingly encourage you to do just that with your money.
Quick side trip: the banks convince you to store your money with them so they can use it (exponentially multiplied) to make loans. They do this by convincing you that your money needs to be kept safe and that compounding interest will be enough to offer a great return.
People often choose security in exchange for freedom and opportunity.
Ask yourself honestly what your money is doing right now?
Is it sitting idle in an account getting .01% interest? Or is it moving? Like most things in life, movement brings life and stagnancy can hasten a slow death. Money is no different. You can be sure that if you’re not moving it, somebody else is applying the velocity of money concept and moving your money for their benefit.
In the insightful book, The Banker’s Code, author George Antone offers several examples to ILLUSTRATE how keeping money moving improves the return on one’s investment.
Comparing different scenarios to ILLUSTRATE his point, Mr. Antone demonstrates how profit margins are increased exponentially by “turning” your money.
Part of his premise is that once your money is invested, you’re missing out on the opportunity cost of that money because it cannot be invested anywhere else.
Consider the following real estate investment examples with $100,000 to invest:
Property A: Down payment on a property that provides $400 per month in positive cash flow
Property B: Buy and hold in a long term, secure, appreciating area
Property C: Buy a property for $72,000 and resell within 90 days at a small profit
While all 3 investments may be favorable, Property C gives you an ability to retrieve the money soon and duplicate the effort.
With Properties A and B, you’ll miss out on potential lost opportunities. This idea applies to many areas of investing in addition to real estate.
Another example refers to a scenario where someone is paying you 12% on a hard money loan. As soon as the borrower makes a payment, if you turn around and loan the money either to him again or to someone else, you just increased your profits on that money. If you borrowed the money to make the loan on a line of credit and then paid it back immediately upon receiving each payment, you just reduced your loan cost dramatically.
In another example, if you have $5000 cash and can choose either bucket:
Bucket 1 offers 1% interest
Bucket 2 offers a 6% savings
This answer should be obvious, but it’s worth examining the following scenario:
An $8000 line of credit at 6% simple annual interest has a daily interest rate of $1.32 ($8,000 x 6% ÷ 365 = $1.32). The monthly interest owed would be about $41.00. If $5000 is paid back on day 2 of the month, this reduces the daily interest rate to about 49 cents.
Point being, money moving in any direction is a good thing for you and the banks would rather you don’t find out about it.
Compounding Growth Tax Free
Now that you’re pondering a wealth building strategy that uses borrowed money and thereby creates financial leverage while also encouraging movement of money or velocity.
The next question is how to maximize leverage through a maximum growth environment. This calls for another example using compound interest.
A penny doubled every day for 30 days equation
You’ve heard the one about the college classroom who was offered a choice between receiving…
A penny, with the amount doubled every day for 30 days
So the equation goes, the amount that started with a penny and doubled every day looks pretty tame until about day 20 when the numbers take off. On day 30, the total amounts to a whopping $5,368,709.12 in a tax free environment.
But here’s the shocker…
Guess what this result looks like in a taxable environment?
Same penny, same scenario but if assuming a 30% tax bracket would amount to only $48,196.86.
Major point being, there are huge advantages to a tax free environment allowing for tax free wealth accumulation. This is what is offered by the top dividend paying whole life insurance companies for infinite banking. Dividends accrue within the policy because they are a tax free return of premiums and not income.
Tax free growth is an unbeatable advantage for growth. Better yet, with a non-direct recognition company, cash can be continually utilized via policy loans (which can be easily repaid) without affecting the dividend rates. Drawing from our velocity example above, this structure allows for maximum velocity.
Why the critics are missing the point?
If you haven’t figured it out yet, you’ll discover that the financial talking heads primarily criticize infinite banking as a scam because they believe it is a trumped up way to promote cash value life insurance as an investment. They consider this investment touting to be trudging on their turf, so they react in a rather gangster like fashion, with indignant claims that often turn belligerent.
In this turf war, the critics (think Dave Ramsey life insurance) levy any number of attacks such as “cash value life insurance is too expensive”, “buy term and invest the difference” (invest with us) OR my favorite, “that other investments offer a higher average return”.
These suggestions are ALL irrelevant when you consider the above truths about money. The power to harness the velocity of money in a tax favorable compounding environment is a question that should be independent of what kind of investments you choose.
When your priority becomes ALL ABOUT keeping your money moving and exponentially building wealth, you’ll stop comparing cash value life insurance to other investments. You’ll start thinking of it as a place to borrow money at low rates while also receiving tax free wealth building growth. The other investment vehicles touted by Wall Street and the financial community do NOT deliver as much in this regard.
I hear them now…preparing the rebuttal, but, but, but…you can borrow against your 401(k). While this is true, you cannot do it with the same level of performance (leverage), freedom or flexibility. For example, 401(k) gains are not tax free but rather are tax deferred and this removes the advantage of a tax free environment.
A Roth IRA may be borrowed against but borrowing is much more restrictive, and the opportunity for leverage is severely limited.
Another alternative may be a self directed IRA, however once the money is tied up, it can no longer be used and repayment is tightly regulated by IRS rules.
We encourage careful consideration of your investments here at Insurance and Estates. The important thing may be to consider your concept of money as you’re planning your next steps. We’re here to help if you need us.