E133: Think You’re Not Financing When You Pay with Cash? Think Again

Nate: In this episode, we discuss the economic fact that you finance everything that you buy, even when you pay cash and how you can situate your finances in a way that allows you to make a profit on everything you buy. She’s Holly and she helps people find financial freedom.

Holly: He’s Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right, welcome back to the show. We’re excited to be here with you all today. And we’re actually going to be discussing a topic that for all of you, infinite banking fundamentalists, who’ve been around for a long time, clients of ours and so forth. You’ve probably run across this, but it’s always just a good reminder we should always keep in front of us as we make decisions on how to purchase things. Because Holly, I don’t think a lot of people outside until Nelson Nash wrote the book called Becoming Your Own Banker. And really created this concept, the idea that you finance everything that you buy, you don’t get that really from anywhere in a very layman’s terms, the way that Nelson Nash discusses it in his book.

Holly: Now. And I think through reality is even talking to individuals that are new to the concept or even old to the concept. I think it’s easy to forget Nate, that every single purchase we make we are financing it. We’re either pulling money out of our bank account or we’re using somebody else’s money to pay for it like a house. So the bottom line is you’re financing everything, you have to have money to do it. And in today’s society, a lot of us have, even in order to finance it, we don’t necessarily have the money but we have a credit card. And so we put it on the credit card or we borrow the money from somebody else to be able to buy it.

Nate: I think probably in economic circles, the term could be used to describe it called opportunity cost. There’s a real opportunity cost to everything we decide to do. And Nelson Nash has made it very clear. And by the way, this is one of the fundamental things you have to actually comprehend, understand, and buy into early on in your infinite banking journey for a lot of things end up making sense as you actually practice this thing. And I think we can talk about that in a little bit, but essentially the idea here is that you finance everything that you buy. There’s really only two ways to make a purchase that we know of in this life. You either build up cash in an account and withdraw money from that account to make a purchase, or you borrow somebody else’s money to make a purchase.

Everybody knows when I borrow somebody else’s money, I have to pay them interest. So we think of that as financing the purchase, I’m going to use their financing package, I’m going to borrow their money to buy a car, or a computer, or a TV, or whatever that people are financing these days. And I’m going to pay them back with interest. What we don’t always comprehend or understand while we’re just living life is that, hey, whenever I pay cash for something, I may not be paying anybody any interest. However, that money is gone forever. And I will never be able to earn interest on that money ever again. So I’m stuck with these two options, I either pay cash and lose any interest I could have earned, or I borrow somebody else’s money and I have to pay them interest. So really both options are kind of sitting here and they’re in a similar playing field.

It really wasn’t until Nelson Nash kind of described a third way to finance something that you found out, hey, there’s actually kind of a third option that sits in the middle of these that actually turns out to be better than just doing one or the other. But it was not until you understood, okay. Yeah, I am stuck. I may be paying cash for everything, but still I’m not making any money on my purchases. We’ve talked to people who bought cars and I’ve heard Ray ask this question many times and just true. You ask a guy who’s paid cash for every car he’s bought. You ask a guy who’s financed every car he’s bought. And you ask them the same question, “How much money do you have from all the cars you bought?” And they’ll both just say zero.

So the question is, what good was it paying cash? Or what good was financing if you just don’t have anymore money. Nelson has really hounded this in his book, you finance everything that you buy. And as we move down this podcast, I really do think maybe we can unflesh some things as to why it’s so important to understand this when you start using policy. So Holly, what is kind of this third in the middle method that Nelson describes you can do? And that all of us practicing infinite banking are using to finance the things we buy.

Holly: Well, really it’s the infinite banking concept, but what you’re doing is you’re taking your money or depositing it into your life insurance policy. And then you’re using that policy, you’re borrowing the money back out to pay for your purchases. So literally you are able to use the money and kind of pay yourself back because you’re a shareholder. But the simplicity of it is a lot of people think, Nate, that it’s really complicated when you’re really just adding one more step than what you traditionally do already.

Nate: Yeah, exactly. And if this was maybe a YouTube video, I could actually show some numbers and maybe that would’ve been helpful. But what even banking method allows us to do, and it’s the only place that we know of that’s very consistent in this using these high cash value life insurance policies to finance the things that we buy. The reason why it works out really well is because when we borrow against the policies, we’re not actually withdrawing the money. So if you’re…

Holly: Yeah.

Nate: So all of you… What we brought up at the very beginning was normally when you purchase something, when you buy a car as our example, and it’s $30,000 or whatever amount it is, you really have these two options. You have, I can build up cash in an account and then spend it all on this car and that money’s gone forever and won’t earn me anything. Or I can borrow somebody else’s money and pay them interest for this car. And that’s the only two options we have.

Well, there’s kind of this hybrid method that uses leverage, I guess. It involves, okay, if I build up $30,000 inside of my policy, I can borrow against that policy. And yet since I didn’t actually withdraw the money, I just posted my policy as collateral essentially to the insurance company and they gave me a loan that I’m in total control of by the way of how I repay it. And so maybe we won’t get into all those details yet.

Holly: Yeah.

Nate: Well, this is this interesting hybrid because yes, I can build up money into policy and borrow against it and have the policy continue to grow on the full amount, because it’s not actually withdrawal. But the loan is a real loan though, Holly. In other words, we are going to pay interest on this policy loan, but the reason why it works out so well is because the loan is on an ever decreasing balance. So let’s say I borrow money to buy a car and I start paying back my policy. I’m paying interest on the policy loan. However, every time I make a payment, the balance on that loan goes down. So the interest that’s being charged is on an ever decreasing balance. So I start paying less and less interest to the insurance company for the policy loan. However, my $30,000 of cash value that I use to help buy the car, that money is compounding on an ever increasing basis.

So every single time, no matter what we do, if we use a policy to finance something and then pay it back, you’ll actually always have earned more interest inside the policy than what you paid on the loan just based on math. Allowing your money to continue to compound the entire time is really what we’re after, and it’s what Nelson Nash was after in his book. That the goal is to have as much money compounding at all times. That concept really only makes sense once you understand that everything is finance. There’s an interest cost to every decision that you make. How can we situate our finances in a way that allows us to profit on that fact?

Holly: Well, and I think, Nate too, the reality is when we say it’s a hybrid, you’re pulling a loan. So in reality, you are paying cash but the interest that you’re paying is back to the insurance company versus a bank or somebody else. And you’re a shareholder in that insurance company, so you are making a profit. And the fact that the money never left your life insurance policy. Now that’s a key there, he said that. It never left the policy, it’s a loan. So it’s still in their accruing compounding interest. And the reality is that you do it… We used to say, you create appreciating value. What you do is you turn those purchases or assets into additional money. I say you can make money buying groceries, but you really truly can because of the compounding that’s taking place in the policy and the loan money being paid back.

Nate: It’s a mathematical equation that exists that, hey, if I have one asset that is compounding and I have one asset where the balance is declining, the compounding asset will always accrue more interest than what I paid, well, to a certain extent. I mean, I guess were paying like 30% interest and only earning 2%, that probably wouldn’t work.

Holly: Yeah.

Nate: But to a normal degree, the compounding asset always wins. So it’s very important to be in a position where your money will continue to grow no matter what you do. And that’s what we have in this world of a policy. We can use it as many times as we want for all these different things in life that come up, whether it’s cars, or education, or weddings, or vacations, or investments. And while we’re using it, the policy continues to compound on its entire value, no matter how many times or how much money we pull out. And that is it. It’s hard to realize that the power of that until you can see it in your own situation. One of the reasons I wanted to also bring up too, Holly, why it’s very important to understand this is because as you’re getting into the infinite banking world. Maybe for those of you who already have policies, a very common question we get is, well, why would I want to use my policy and pay interest on it? Or some of these questions can still come up of well, how is a policy loan beneficial to me?

Holly: Yeah.

Nate: And then why would I pay interest on it? And you have to take everybody back to the truth that everything is financed. So while it is true, if I take out a policy loan, I’m going to pay interest on it, the question is how much money is my policy going to grow on the back end compared to the interest that I end up paying on the loan? And anytime the growth is greater than what I pay, I’m a happy camper. So we always have to come back to this truth, as you’re actually doing it. Well, should I borrow from my policy to do this or should I build up cash in the bank account to do this? Or I guess what the people who don’t understand this principle have the hardest time using policies because they don’t understand how they’re going to end up being ahead as compared to the old way.

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Holly: The easiest way to understand it is when you take your first loan and you start paying that back or recycling that money and you see what it generated or how much it generated and you’re able to walk through it. But until you actually see the process working, then you don’t really understand it. I mean, I had so many people be like, “Oh, well I would just pay cash for it.” Well, then you just save up for the next item and that money’s not earning any interest. When you’re still paying cash you just had to save it in the policy and take it out as a loan, so you still have that interest accruing. But the reality is that you can go on vacation, I use this a lot, but you can go on vacation and enjoy the vacation, knowing that your money is making money while you’re on vacation.

Nate: Yeah, it’s a new world and it’s really fun to be a part of, but it definitely takes some time. And so essentially Nate, you’re telling me that I can pay interest to somebody and actually make a profit? And I’m sitting here saying, “Yeah, you can.” So it’s one of those principles that really without comprehending this fully even banking can seem very confusing. It’s actually… But it’s just math, it’s not actually a very complicated procedure. But wait, you’re saying Nate that if I borrow money for my policy and pay my policy back, I’m actually going to be richer than if I had just built up money in a checking account and paid cash for it and paid nobody back? I’m saying, “Yeah, that’s true.”

Holly: Yeah.

Nate: And it’s math. So I know on a podcast maybe we can’t really run calculators and show distinct examples per se. But all that the… The principle at work is always the case. So some people, they’re all cash paid people, they never want to finance anything because they hate paying interest. And while I think there’s some value to that, this is one of the reasons why we also suggest taking a look at cheap money to begin with.

Holly: Yeah.

Nate: In other words, if you have an opportunity to get a very low interest rate mortgage. And so if someone walked up to me and they had $300,000 in cash and they also had $300,000 in a mortgage at two and a half percent for 30 years or something like that, or let’s just say 3% for 30 years. And that’s a tax deductible interest rate, so their net after tax interest cost is probably more like 2% or so after the deduction. And so we’ll still have people saying, “I want to go pay off this mortgage because I don’t like paying all this interest.” And I say, “Well, that’d be fine. Yeah, we could take 300,000 and pay off this mortgage and then you wouldn’t pay the interest to the bank at all, and that’d be great.”

But the question is what would you be able to do with that $300,000 if we didn’t pay off the mortgage? And is there anything you can think of that would actually earn you more interest than the mortgage is costing you? And as we’re sitting here, obviously a policy would fit that bill, but almost anything in life would fit that bill.

Holly: Yeah. Would generate you more interest.

Nate: Would generate you more… Yeah, more profit, more interest than what’s costing you to hold that loan. So the same principle applies everywhere that not all interest is bad. The question is, are you able to make more than what it’s going to cost you? And that should really help you determine what choice to go forward with. But the nice thing about the policy is it just caked into the system. In other words, there’s a policy loan provision on every policy that allows you to borrow the money and have the cash value continue to compound on the full amount that just exists with us. And so it’s very easy to use. If you own stocks, you can do something kind of similar with a margin account. You can borrow against your stocks.

The problem is, since stocks are not guaranteed to grow, if they lose value, you can be in a dangerous position. Because if you’ve borrowed enough and then the stocks go down in value, there can be this thing called a margin call and you’re forced to sell your stocks at a huge loss, no questions asked to repay the bank and so forth. So there’s a lot of risk involved there. So in other words, there’s opportunity to do this similar style of financing with other assets, but there’s nothing that just comes prepackaged that works perfectly no matter what as using an infinite banking policy to finance things of life. That’s why it’s the best tool we know of to make this happen.

Holly: As much as it might seem complicated, it really isn’t. It’s just understanding that literally you’re either giving your money away to somebody else irregardless whether you’re paying cash or you’re paying borrowing from somebody else. You’re literally giving what you’re earning away to somebody else, it doesn’t matter. And unless you change the way that system works so that your money comes back towards you or is earning a profit while you’re using it, then you’re never really going to get ahead in life by just doing the same old thing. I mean, have you ever heard of somebody that’s made millions or billions of dollars by paying cash for everything?

Nate: Rarely ever.

Holly: Right, borrowing at a low interest rate and then using their money for something else they have, well, this is the same concept. What you’re doing is you’re just using your money in a system that allows you to be able to borrow it and go out and make more profit on it.

Nate: Yeah, I remember a story, this really hit home, that the wealthier use this obviously all the time. There’s many different stories I can think of too. First off, Mark Zuckerberg back in 2010, 2011, after the financial crisis, when mortgage rates were really just bottoming out. And people were surprised that he went out and bought his home and he did not pay cash for it. They were like “This guy’s a billionaire and he’s got a mortgage on his home.” And they asked him, why is Mark Zuckerberg borrowing money to buy this house when he’s got billions of dollars? And they said exactly this, they said, “Right, a bank is willing to offer him money for 30 years at, it was like 2% at the time.” Because he is a completely no risk borrower. There’s no way this loan’s going to default.

So they gave him money at like 2%. And I mean, that’s what they said, that’s what he said. He said, “I know for a fact I can take my, I don’t know…” It actually wasn’t that expensive of a home, by the way. That was also part of the news, it was maybe $10 or $15 million, which to a lot of us sounds, yeah, that’s a pretty expensive home. But to a guy who’s worth multiple billion dollars, it really wasn’t. But they were, he’s saying, “I can take my $10 or $15 million and do something that is going to earn me a lot more than 2%. So why would I throw the money into the home when I could go throw it into something else?” And that’s really what we’re talking about. Even today though, it’s very common. This is big at Congress right now, as far as how to tax rich people. Because rich people already they’re making… All these mega rich people typically are the owners of highly trading for public companies. Their wealth is solely resided in the stock price of the company that they run. That’s very common.

And the thing about stocks is you only pay tax whenever you sell the stock. So the stock can appreciate for your entire life. And if you never sell it, you never actually pay tax on the growth that accrues. And so what these rich people do instead selling stocks to pay their lifestyle. What do they do? They just borrow against their portfolios to pay for their lifestyle. That’s how the Donald Trumps and the Jeff Bezos and all these people that the liberals want to try to attack for gaming the system, that’s just what they do. And a loan transaction is never a taxable event. So they’re trying to… They say, “Hey, if you’ve received over $1 million of unrealized gains, we’re going to start taxing it,” which is going to make a mess of things financially in so many different areas.

But they’re seeing, this is what rich people already do, where I’m going with that Holly. Rich people are already leveraging their money to allow it to continue to compound and especially in a tax-free environment, which we automatically get inside of a policy as well. So the you and me level, we’re mimicking what the wealthier people are doing to our level, which of course is a lot less zeros on the page, but it’s still the same principles that they are using to build wealth.

Holly: They’re using their money to do more than one thing.

Nate: Right.

Holly: It’s not guaranteed just sitting there doing absolutely nothing. You guys have to understand the opportunity cost. You have to understand you have to capitalize on your dollar. If you don’t do anything different with that dollar, then somebody else is going to earn it, more than likely it’s the rich. Because they’re not just letting their $1 do one thing, it’s doing multiple things, working in multiple ways to earn more money than the dollar it’s worth.

Nate: Exactly, having money do multiple jobs is also a brand new concept to a lot of people. But the idea that I can have a policy with a cash value that’s growing and then leverage that policy to, let’s say, go buy a real estate rental property and have that be growing. I got these two things growing at the same time with just $1 that I’ve used to put into it. It used to be, I can either have a policy or something like that or a property. But the fact that I can have both comes from the power of leverage. So leverage allows you to have your money do multiple things at the same time and make a profit in multiple ways. And so that’s one of the things that we get to access with this concept just built in, caked into the formula, which we love. Anything before we close it down, Holly?

Holly: Yeah, and I’m going to say, I know Nate you touched on this, but I just want to say that the reality is a loan in a bank is not considered a liability. A loan on the books is considered an asset. So a debt or that owed to yourself or to a life insurance company where the money is already growing in a tax-free environment for you is not bad to owe yourself money or to owe a life insurance company of which you’re a shareholder. Because that money’s going to continue to grow. So the reality is there still are principles and rules you have to follow but you have to get out of your brain that debt is bad, or if I have a loan it’s bad. You don’t feel so bad when you’re writing a loan repayment that you know is benefiting you.

Nate: Yeah. I mean, at the end of the day, whenever you take a policy loan, which we didn’t have time to get into in this podcast, just the flexibility of it is totally different. So I don’t really love borrowing money from banks as much as I can because you got to follow their rules and go through their approval processes and have strict payments and penalties for doing certain things. With a policy, it’s so flexible. I’m in total control of how I end up repaying this thing. How much I want to put towards it, how often, no penalties or fees or late payment things that are happening. So it’s just a perfect place where I feel like I’m in total control. I get to benefit from the leverage without all the typical hoops to jump through that I normally would have to go through to be able to access this type of leverage.

So it’s just a great place to be able to manage money. And as you said earlier Holly, whether you’re buying groceries or whether you’re buying expensive commercial property, using the policy to help fund these things, it can help you actually make a profit on every purchase you make simply by allowing the money to compound for the rest of your life, even though you’ve accessed it to put it to work. That can be a very powerful solution. Well, thanks everyone for joining us. This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e133.

Announcer: Dollars and Nonsense podcast listeners, one more thing before you go. Ease your worry and start your journey towards security today. Visit livingwealth.com/secretbanking. You’ll gain instant free access to the special one hour course Holly and Nate made for you. Again, that’s livingwealth.com/secretbanking.