E171: Have Financial Freedom with IBC: The 6 Principles You Need to Know (Part I)

In this episode, Nate discusses the six financial principles that serve as the bedrock of the Infinite Banking Concept.

Topics Discussed:

  • You Finance Everything You Buy
  • Banking is Inescapable
  • People succeed best when they implement a process
  • Capital Attracts Opportunities
  • Mutual Insurance Companies provide the best way to “plug in” to the banking system as owners.
  • Safe Capital creates an Antifragile financial position

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Podcast transcript for episode 171: Have Financial Freedom with IBC

Nate: In this episode, I discussed the six financial principles, that serve as the bedrock of the Infinite Banking Concept. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

I want to start this episode off, with just having everyone understand this idea. And this idea, is that a strategy may involve investments, but the strategy itself, is always deeper than the investments that it’s involved with. I want to talk today about the principles of infinite banking. The six key principles of IBC, that really make this thing work, and what has kind of pushed this idea about, is of course, I meet with a lot of people, and while I’m meeting with them, many of their questions and perspectives, are based on an assumption, and that I think underlays it, and I wanted to kind of define what that is. So it’s based on the assumption that what infinite banking is really all about, is the benefits of a life insurance policy.

And so, they may consider whether it’s the guaranteed growth and dividends that are tax-free, and so they’re like, “Okay, this is what it’s all about, or it’s about the policy loan features, that’s what it’s all about.” Essentially, the policy, is the Infinite Banking Concept, or the becoming your own banker idea.

And I’m here to say, that that is a very shallow way to think about it, and I wanted to bring up the fact that, that same type of thinking, would be a shallow way to interpret many things financially. So that’s why I wanted to kind of push this forth, that strategies may involve investments, but the strategy itself, is never the investment itself. The Infinite Banking Concept, or becoming your own banker, involves the purchase of a specific type of life insurance policy, but the becoming your own banker strategy, is not the policy.

So take for example, the idea of, Warren Buffett, per se, or any other big player. And so this idea, that strategies involve investments, but the investments themselves, are not the strategy. What this essentially means, is people can choose to invest in the stock market, people can choose to invest in the real estate world, with no strategy involved.

They can be a very passive individual in the world of investing, but understand, that if you were to involve a strategy, it would be deeper than the investment itself. So what that means, is like Warren Buffett, he does own stocks, right? He does own stocks. The stocks, are part of his overall strategy, and so I know this would be a simplified view, but it’s the term that’s used for Warren Buffett’s strategy, is a value-based investing strategy. And so he has a strategy, that determines a set of principles, that’s what we’re describing here, a set of principles, that when looking at the world with those principles, he is able to determine where to put his money, and how to act, based on the principles he has set forth.

The value-based investing strategy, is essentially, he has a process, a system for a strategy, one could say, for choosing whether a company is overvalued or undervalued. And so he is looking to find companies that are undervalued, based on the strategy of value investing, and that is where he’s going to choose to put his money.

The stocks that he owns, is a means to an end. It is part of the strategy, of course, it’s how you obtain ownership in undervalued companies, is to either purchase the company through private equity, or to invest in their stocks, if it’s a public company.

Notice that, that’s a little bit different, than an individual who is just has retirement programs, and is throwing money into mutual funds. There is a strategy at work there, it’s just less so, in other words, it’s a passive one. The strategy, is the mutual fund itself. The strategy, is the diversification of risk across many different companies through a mutual fund, and as opposed to buying individual stocks, and you would obviously say, that Warren Buffett has done very well, following a strategy of value-based investing.

The same thing goes in the world of real estate, some people are principled investors. They’re the ones looking for certain property types that fit certain principles, that their strategy that they’re implementing is producing. The real estate itself, is based on the principles, so they’re not actually getting what we call their ears tickled by good rates of return being pitched out in the marketplace, they’re seeking out properties based on a certain set of principles.

And so this is the idea though, that I believe infinite banking pushes forth, and I believe it’s a mistake to assume that we are pitching an investment opportunity, instead to think more so, we are pitching, we are teaching a strategy to become your own banker. It will involve certain things, i.e., a policy, but the strategy itself, is what we’re after. I think that people avoid the idea that IBC is a strategy, because they’re trying to pierce through, and get to the bare bones of it, but they’re missing out on the idea that the strategy itself, is built on a set of principles.

And one of the things you’ll notice, when I discuss these six principles of which we’re going to do three today, but I’m going to describe all six in great detail, is that none of them include the rate of return of a policy. That is obviously a big deal, it really is, but that is not a principle, that makes IBC work. The rate of return of the policy, helps you achieve the goal of becoming your own banker, because of the principles that support it.

And so, what I’m trying to put forth in this episode, is that infinite banking is based on a set of core principles, or concepts, or ideas that make up the strategy of becoming your own banker. When you don’t understand, or believe in, these principles that are put forth, the details of the policy won’t matter very much. Or in other words, you can choose to buy a life insurance policy for the benefit of a life insurance policy, with the guaranteed growth, the death benefit, the tax-free nature of it, the safety of it, all of these things, you can choose to do, without believing in the principles and the concepts, put forth by the Infinite Banking Concept.

Just like you can buy real estate with no overall strategy in mind, you can buy stocks with no overall strategy in mind, just for the benefit of owning a mutual fund, just for the benefit of owning real estate. The idea though, is that the most successful people in the financial world, implement strategies, and that’s why one of the reasons why I love IBC, is because it is strategy-based, not tickle-my-ear-rate-of-return based. So of course, every strategy must result in greater financial value being achieved, at some point, due to the growth of the assets, otherwise it would be bad strategy. So it’s of course important, but if you don’t understand the principles that underlay it, it won’t really make sense, and the details won’t matter, because if you dive into the details, and skip the bedrock of the concept, if you skip the bedrock of the concept, then you will not actually believe in the idea. You will just own a life insurance policy, because it’s a valuable resource.

That’s not the end of the world, but that’s certainly not infinite banking, and which is, by the way, and just referring back to some previous episodes, which is by the way, the reason why it can be difficult to share the message of infinite banking with people around you, because what we like to do is pitch it like an investment.

So we’re going to do the first three today, and we’re going to do the next three in our next episode, and they’re not in any particular order. It’s not like the first one is more important than the last one, they’re all equally important, and serving as the bedrock. So we’re going to tell you all six right now, and then we’re going to dive into details for the first three. So the first principle that IBC, is based on, is the idea that you finance everything that you buy. The next one, is that banking is inescapable. Banking is, and is part of the reality of life. The third one, is that people succeed best when they implement a process. This is a principle. The fourth one, is that capital attracts opportunities, this is a principle, or that capital helps you take advantage of opportunities, whichever one you want to say.

The fifth one, is that mutual life insurance companies, function in the same business model as banks, but allow for different ownership. And so, it allows you to essentially become your own banker through this. It’s based on a process, a strategy, as opposed to simply a pitch. So we’re going to talk about that and that’s number five.

Number six, is the idea that I’m falling in love with, the idea of anti-fragility. And this one is a complicated sentence, we’re going to dive into it next week, but having non-volatile assets, puts you in an anti-fragile financial position. So, let’s dive into the first three today.

First financial principle, is you finance everything that you buy, and Nelson really tried to beat this home, if you don’t understand this concept, or you don’t believe in it, or there’s some sort of confusion here, then some of the technicalities of practicing the becoming your own banker idea, through dividend-paying whole life insurance, will become confusing.

So, here is essentially this idea at hand. Whether you pay cash for something, or whether you borrow money from someone else, everything is essentially financed. This is a core principle. So when you pay cash for something, whether that’s like a car, or whether that’s an investment opportunity, or anything in between, when you pay cash for something, you don’t owe interest to anybody. We know this. If you pay cash for something, you don’t owe anybody any interest. However, the cash, that you put into this purchase, can no longer earn any interest, or any sort of financial gain for you.

Alternatively, you could have chosen to borrow money from someone else, to purchase a vehicle, or to go on vacation, or to make an investment. You could have chosen to borrow money from somebody else. Of course, you would’ve had to pay them interest, but that would have allowed you to take your cash, and do something with it, that would hopefully produce a profit.

So this is the idea. You finance everything that you buy. You are either going to borrow someone else’s money to achieve something, and pay them interest, or you’re going to use your own cash to do something, and lose any interest that cash could have earned you, and this is the only way to do anything in the world, you finance everything that you buy.

Because of this reality, it will start to make sense somewhat, of what infinite banking is trying to teach, because you’ll hear things from some people, like, “You mean that whenever I borrow money from a life insurance policy, I’m having to pay interest to borrow my own money.” Once again, that question, is based on nonsense, it’s based on nonsense. Not trying to be mean with that, I’m just merely saying, if you understood principle number one here, that you finance everything that you buy, you would understand the fact that, everything has to be done with option one, or option two. Either you are going to pay cash for something, and lose any interest that cash could have earned, or you’re going to borrow money from someone, and pay them interest, but in return, you get to have your cash continue earning profit for you.

And so, in the world of infinite banking, it creates kind of a unique situation, because the insurance company, upon you purchasing the policy, guarantees from day one, your contractual right to borrow against the cash value, up to 100% of it, anytime you want, with no questions asked, and no repayment terms, no amortization schedule put forth. This is why we call it, the interest only line of credit for life.

Meaning you can tap into it as many times as you want, as much as you want, up until you’ve maxed out your cash value, you can borrow all of it, and you don’t have to repay it, until the day that you die. The death benefit will repay it, no matter what. And so you can choose to repay it or not, during that time, and the only thing you have to do, is pay the interest on the policy loan. So the interest company, has guaranteed your right to be able to do this, and in exchange for this right, your cash value, gets to continue earning interest and dividends on the full amount of cash value, not the net amount of cash value. And this is, by the way, this is a logical process, this has to be done.

By the way, you are allowed in the infinite banking world, to withdraw money. You can take cash value from the policy, if you chose to. You can do what’s called a partial surrender, you can just take money out, withdraw money. Of course, remember, you finance everything that you buy, and it’s going to work in either option one, or option two. You are either going to withdraw the money, of which case, that money is no longer in the policy, and is no longer earning interest and dividends for you, so you are withdraw, so you’re no longer earning interest on the money to pay cash for something, or you can choose to exercise your contractual right to receive a policy loan, using your cash value as collateral, which means that you are going to pay interest to the insurance company on the policy loan, but in exchange for that, you’re going to receive uninterrupted compounding interest inside of the policy the entire time.

So what I’m trying to bring up, is this is a principle that really needs to be understood, for the transactions to make sense. It would be a folly, or an incorrect thing to say, that the insurance company, would be willing to credit your account, interest and dividends, on the full amount of cash value, and extend to you, the right to borrow against it with no interest. That would be like a Ponzi scheme style system here. How are they going to receive the income that’s required to pay you the interest in dividends, if they lent all the money to you, and they don’t require any interest to be paid on it? It’s kind of a nonsensical arrangement, so it has to be then, either option one, or option two. You actually have both options inside of the policy, but there are reasons why the policy loan option, oftentimes makes the most sense.

But the first point, is that you finance everything that you buy, no matter what. Whether you practice IBC or not, everyone’s always financing everything that you buy. You’re either paying interest to someone else to use their money, or you are paying cash, and losing any interest you could earn on your own money. Those are the only two options. Infinite banking, kind of does one of the best jobs we can find, to allow for you to choose whichever one you want, at any given moment in time, guaranteed contractually through the policy itself. So they are the ones guaranteeing, and allowing your policy to grow, and they’re also ones guaranteeing your ability to borrow against it, any time, without interrupting the growth of the policy.

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Nate: The second core principle, is that banking is inescapable. We like to say banking is, you cannot get out of the banking system. And I remember talking to a client just a few days ago, he said, “What I wanted to know, was in the next 10 years, would me practicing infinite banking with this policy, produce for me, more money, than if I just continued using my bank savings accounts, as my kind of bedrock for building capital and deploying?” He was a real estate investor, ran a business, and so forth, very common, and he was in the details, “Well, what’s the policy loan rate? What’s the policy growth rate? What’s my savings account growing by right now, and how’s that going to compare to the policy?”

The reason why I think that that’s kind of a question, that shouldn’t really come up, per se, I’m not apposed to it, I’m just merely saying, it shouldn’t really come up, per se, is because of this idea, the idea that banking is inescapable. So the idea of a five-year window, of a 10-year window, of a 20-year window, no matter what window you describe, it’s a bit off base, because we are teaching a strategy that you can implement to practice banking, that you are forced to be in until the day that you die. You are forced to be in banking, until the day that you die, by default, it’s inescapable.

If you don’t want to be in the stock market, you don’t have to be in the stock market. If you don’t want to be in the real estate world, you don’t have to be in the real estate world. You don’t have to be in either of these things until the day that you die. You are not required, it is not the default, to be involved in any of those things. The one default that exists, the reality, is that whether you want to or not, you have to be associated with the banking world, until the day that you die.

The banking world, is the fabric of society. You have to be able to buy and sell things, you have to be able to create income, you have to be able to store income. In other words, some people could say, well, you could choose not to have a bank account, and just use cash only in a safe. That is the banking world, by the way, folks, that’s the same thing. You could choose to use the tool of cash, green papers, and store them up in a safe, and just spend cash for everything. You could choose that. That could be your banking system. You could choose to use your banking system, through checking accounts and savings accounts at banks, you could choose to do that, if you wanted to. You could choose credit unions if you wanted to, you could choose money market funds through your brokerage account.

You can choose to do banking, through many different formats. Of course, our one, is becoming your own banker strategy using dividend-paying whole life insurance. But nonetheless, it is the one thing that you cannot escape. Banking just is. It is a reality. So if we are required to be in banking, until the day that we die, the question is, what is the best solution to achieve the greatest amount of wealth, while being in the world of banking, until the day that we die. And when this is the perspective, which I believe is the proper one, of course, it becomes easier to see IBC, for what it’s trying to bring up. The shorter the timeframe you require IBC to produce profit for you, obviously, the less it looks good. But the reason why I think that would be a weird perspective to have, is because that would imply that after 10 years, he’s no longer a part of the banking world, or after five years, banking no longer exists for him.

I want you to see the nuance here. That is a perfectly acceptable way, to think about investments. What does that look like after five or 10 years? That’s a perfectly acceptable way, to think about many things in the financial world, and it only makes sense for things that you are no longer required to be a part of, whether you wish to be or not. Unfortunately, for all of us, to some degree, banking is required, and so we might as well make as much money as possible. So number two, is banking is inescapable.

The last one for today, number three, is that people succeed, when they implement a process. This is a financial principle, and it’s not only about IBC, but it is a financial principle that exists, it serves as kind of a reality, that I think IBC does a very good job helping with.

So the principle, is that people succeed when they implement a process, or they implement a strategy, or I guess you could say, a framework to operate out of. IBC, offers a framework to live life out of. Most of the time, when you have absolutely no plan, no strategy, no framework to think or live life, this would be like the people who just don’t care much about money, of course. I don’t know if my parents listened to my own podcast, and I certainly don’t mean to throw them under the bus, but I would just say, they would be the people that really financially, there is no real strategy taking place.

And we all know people like this. Maybe, you were one of them at one point, where there there’s no real process, no strategy, no goals, with a plan to achieve, there was nothing really involved, the process-wise, so you just end up where you end up. You did not get to define it, really. And so, this is why we believe, and most people would say, that people who implement a process, or have a strategy to put forth, end up achieving better results. And Nelson Nash, who wrote the book, Becoming Your Own Banker, that started this whole thing, he believed strongly, that every financial strategy that exists, needs to take into account the problems found within human nature. But he takes time in his short little book, describing things like, Parkinson’s law, Willie Sutton’s law, the Golden Rule, the Arrival Syndrome, how to use your imagination. The reality, is he’s onto something, and he’s not alone. The reality, is every financial strategy, must account for the problems found within human nature, and help you overcome them. You can overcome them, without a process. It is true, I’m just saying, it’s more difficult.

The thing that comes to mind here, is Dave Ramsey, which we’ve beat up on, a little bit in this show, and it’s not really to say, that I think he’s crazy, of course, I just disagree on many things. But think about Dave Ramsey, or some other people like this, they are essentially, creating a framework to live life by. Their framework, is not the details of the framework. That goes back to the same thing like, Warren Buffett’s framework for investing, the strategy he has, the framework, the perspective he’s putting forth, served as a framework, to find good deals that he wants that are undervalued, and so forth. So in other words, the stocks are not the strategy, that are the means to an end. The idea, is Dave Ramsey, is actually selling a framework, and what he’s trying to help people overcome, the only thing, is overcome issues within human nature. Like the people who don’t have a process, if they implemented my process, it would go well.

Listen to this really quick, and see if you believe it as well. All of Dave Ramsey’s suggestions, are based on human nature, not math, or we could say, not objectivity. So all of Dave Ramsey’s suggestions, are based on overcoming human nature, not objectivity, and we could just go down the line, to describe that, almost everything that makes up his framework, is actually not based on math, nor is wise, but when you add them all together, and you pitch them to the populace at large, you will find that people who say, “I’m going to commit to this framework,” they start to see financial success. And what’s interesting about Dave’s, is that it’s not even mathematically accurate. So, it’s not actually wise council mathematically, but people live and die by this message, and they have found such healing financially, through Dave Ramsey’s message, which has nothing to do with actual recommendations that make sense on paper. It’s only recommendations, that help people overcome the human nature problems of life.

So think of it like this. He says, “Cut up all your credit cards and pay cash only.” This is not a wise decision. I make thousands of dollars every year in points and cash back, buying things I’m going to buy anyway, using my credit card. Why would I cut those up, when I’m getting 3% cash back, 5% cash back on this, points on this, why would I cut those up, if I’m going to go on the trip anyway? I’ll just put it on the credit card, and I’ll get a whole bunch of points, and I’ll fly free next time. Why would Dave Ramsey not like this? Well, of course, it doesn’t fit the framework.

The same thing goes for his recommendation to buy a house using a mortgage, a 15-year mortgage. The shortest term mortgage you can get, and not only get a short-term mortgage, pay extra principle, to erase the balance of that mortgage, so you can be completely debt free, as fast as possible, and get this, as part of the framework, don’t even invest money in the 12% mutual funds that I guess you can find, according to him, don’t invest money there, until after all your debt is gone, and the house is paid for, and you have this huge emergency fund sitting in cash doing nothing. Once you have all that, then you can start doing best.

Once again, guys, that is not mathematically correct. If you were to do the math, you would find that a two, or 3%, 15-year mortgage, that you are paying extra principle down on, is actually not going to achieve the greatest amount of wealth for you. Instead, you could just simply put, go for the 30-year mortgage, and take that extra amount that you would’ve committed to paying down the mortgage, and stuff those in your 12% mutual funds, and you would be able to pay off the house, and have a whole bunch of money left over at the end of the timeframe, very, very easily.

So in other words, his framework, is simply a process, that if you live by, you truly will have success. Is it the best? Is it the most profitable way to live? No, it’s not. Objectively speaking, mathematically speaking, it is not. And he is willing to admit this, by the way. This is why I’m actually, he’s growing on me a little bit, even though he, of course, he would hate infinite banking, and hate life insurance at all, because it doesn’t fit his framework, for many different reasons, but all that to say, one of the, I remember watching a podcast, a video that he shot with Ben Shapiro. So Ben Shapiro, was interviewing Dave Ramsey, and Ben Shapiro, was poking at some of these framework recommendations that Dave Ramsey has. The idea of paying off your house early, the idea of not investing money until you pay it off, the idea of snowballing your debt, by choosing the debts that have the lowest balance, instead of the debts that have the highest interest rate.

So Ben Shapiro was saying, your recommendation, is just pay off low balance debts first, but Dave, mathematically speaking, it actually would make sense to do the highest interest rate debts first, mathematically speaking, and Dave agrees, and I loved his response. This was his response. I think it’s hilarious and true. He goes, “Well, listen, I understand how math works, I’ve run all the numbers, I, of course, know that, but hear this, Ben, these people did not find themselves in the financial trouble they did based on math, so math is not going to get them out.”

And I was like, Amen to this, brother. Amazing insight. People make decisions based on human nature, that can be good or bad. Any framework, has to account for some of these issues. So there’s that element of it, and Nelson Nash talks about it, it serves as kind of a principle of IBC, but what really what I’m trying to get at, is that when you have adopted the Infinite Banking Concept, and I think clients are trying to find words to you to describe this, that essentially, the IBC framework, has allowed them to see the world differently, and act differently, and they believe that it’s going to help them achieve results through the framework, that becoming their own banker, the perspective sees the world by.

And what I’m saying is, while of course, I believe the math works in the favor of IBC. What I’m saying is, it is kind of like the Dave Ramsey approach, where the math starts to not even matter as much, because the framework is going to be successful, if you do it. That’s what we love about IBC.

So if you do Dave Ramsey’s framework, you are going to be fine. Now, would you have been better off doing other frameworks? It’s very, very likely, math-wise, it’s definitely true. IBC, I think, has more math in its own favor than Dave, but the idea is that the IBC framework, also in a similar way, presents a process, a strategy to implement, that if you follow the rules of banking, you will be successful, really, no matter what.

And that’s what Dave Ramsey was trying to present, by the way, is what is a formula for success, that really they’ll be successful no matter what? And he says, “Get rid of all debt. Sometimes things can go bad with debt, of course, live on way less than you make. It’s very hard for difficult financial times to have, fund an emergency fund.” He’s trying to create an unbreakable financial framework. That doesn’t mean it’s the best, it’s just saying, “What is the simplest way, to become more successful financially?” He says, “Let’s do that.” And I’m all for it. I think I agree with some of the premise of this, and so Nelson Nash, tries to describe it, that people succeed best in life, when they have a process or a framework to follow, whether you’re Warren Buffett, whether you’re Dave Ramsey, whether you’re Nelson Nash, you implement the framework, it’s going to work. I think IBC has a ton of math on its side, of course, but you’d have to understand, that some of the recommendations that are made inside of IBC, are framework oriented.

So those were the first three. You finance everything that you buy, banking is inescapable, until the day that you die, and that people succeed best when they have a framework to live by, or a process to implement, and it allows them to be more successful, than if they were to just do whatever they felt good with, at any given moment in time.

Then the next three, we’re going to talk about next week, are capital attracts opportunities, mutual insurance companies, are a better place to bank. This is a principle, not based on a policy growth rate, and is a principle that I hope to share. And then lastly, the principle being anti-fragile, or the idea of having non-volatile assets, creating for you an anti-fragile financial position.

I think I’m excited for those. I hope these first three were helpful. Remember really quick, as we close down, that when you don’t understand, or believe in the set of principles or concepts that serve as the bedrock of IBC, the details of the policy, won’t really matter. They would only matter to you, if you’re actually only in it, not for the concept, the framework of living life by, if you’re only interested in IBC, or as a policy, as an asset, to store money up in, then you can just care about the details of the policy, without understanding any of this, and just choose to buy, whether you like the details of the policy.

But those things, only really are here to support this framework. If you understand the framework first, the principles first, and then the details of the policy can support that. If you just go straight to the details of the policy, and miss this, then you won’t understand how the puzzle fits together to create the proper framework. I’ve had fun doing this. I hope this has been enjoyable. We will see you guys next time for part number two. This has been Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Announcer: One last thing before you go. Start your journey towards financial security and wealth today. Visit livingwealth.com/beatinflation. You’ll gain instant free access to the beginner’s course, Ray, Nate, and Holly, made just for you. Again, that’s livingwealth.com/beatinflation.