In this episode, Nate Scott discusses the confusion that happens when you misclassify policy transactions as income statement transactions instead of balance sheet transactions. Nate explains the difference between income statement and balance sheet and how they interact with each other.
He provides examples of income sources and expenses and how they affect the net free cash flow. Nate also discusses the movement of money on the balance sheet, including the impact of policy loans and repayments. He ends the episode by emphasizing the importance of understanding the classification of policy transactions and their impact on the overall financial picture.
Key Takeaways
- Misclassifying policy transactions can lead to confusion and misunderstanding of their impact on personal finances.
- Income statement transactions and balance sheet transactions are different and should be classified correctly.
- Understanding the movement of money on the balance sheet is crucial for effective financial management.
- Policy loans and repayments are balance sheet transactions and do not add new expenses to the income statement.
Episode Resources:
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LIVING WEALTH PODCAST
DOLLARS AND NONSENSE: EPISODE 233 TRANSCRIPTION
Nate Scott [00:00]:
Many people investigating infinite banking, and even those practicing the concept, practicing IBC, can get confused because they misclassify whether policy transactions like premiums and loan repayments, they misclassify whether they belong on their income statement or whether they belong on their balance sheet. I’m here to clear all that up today.
I know that after watching this episode, so many questions will be answered, and I think you’ll have a crystal clear understanding of how IBC works inside in the nitty gritty. So let’s go ahead and dive in. I’m Nate. I make sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.
Nate Scott [00:43]:
All right, everybody, welcome back to the show. This is a very fun topic for me to get into. It can be a bit nerdy at times, but I’ve actually done this once before, and it was really, really well received, both at a live event and on the podcast, like a year or two ago.
And so I wanted to dive into this again today because I really do believe where most people get hang up when they’re learning about infinite banking, a lot of times it’s because they have this idea in their head that maybe doesn’t actually align with what’s going on in real life when it comes to paying premiums and making loan repayments.
And I think, actually the easiest way to do that, and I’m gonna, by the way, I’m gonna share my screen here. I’m gonna write some things on the board. So if you’re watching this on YouTube, great. If you’re listening to it, I’m sure you can get the vast majority of things from it, but you might also want to hop on the YouTube channel as well at some point to watch it.
Nate Scott [01:32]:
But with that being said, I think the easiest way to clear up so many questions that people have is really to understand how infinite banking impacts your income statement and how it impacts your balance sheet. And then also just use this as a time to learn how the income statement and balance sheet talk to each other.
If anyone here has followed, like, “Rich Dad, Poor Dad” by Robert Kiyosaki, he brings up, really, the fact that all of us really have our own personal income statement, our own personal balance sheet. And a lot of times, financial confusion occurs because people misclassify things and they don’t really know how they correlate to each other. They don’t know how liabilities can take money away from you, assets are supposed to put money back in your pocket, all of these sorts of things.
But the same thing definitely happens in the world of infinite banking. So I want to dive in to really discuss, like, okay, how does infinite banking really impact my income statement and balance sheet? And with that being said, all of these issues that people have, whenever they’re doing infinite banking, and maybe they feel like the premiums are kind of a payment they have to make, an obligation and they start putting policy premiums down as expenses, or maybe they start paying, putting policy loan repayments down as expenses, and it starts to feel like if they’re doing this, they’re going to create more expense or more liabilities in their life.
Nate Scott [02:58]:
And what I’m saying is this quick summary will show you what’s actually happening. And it’s not some sort of smoke and mirrors thing. I just think that we have a tendency to misclassify the transactions and put them in the wrong place in our mind, and then it causes a lot of issues. So I’m going to go ahead and dive in with a real life scenario and just show you how IBC operates within your life in a very simple way.
So we’re going to dive onto the screen now, and I’m going to go to, we’re going to start on the income statement. And you’ll notice that up here on the top of the income statement, I’m just going to put down all the different forms of income that you may receive in your life. So that’s things like maybe you have a W-2 income, maybe that’s from working a job.
Nate Scott [03:39]:
Maybe you have a 1099 income if you are, you know, selling something commission based. There’s also this thing called a K-1 income, which is like small business ownership income. It comes to you in the form of a K-1 tax form, all these types of income. And then we’ll also throw in like an investment income, whether it’s real estate lending, even like policy, cash value growth and dividends, or, you know, savings account interest, and all sorts of these things.
All of these things are put onto your income statement as income, of course. And so you may be an individual who has all different kinds of income, like I do. I actually have some W-2 income.
Nate Scott [04:21]:
I have a lot of 1099 income, some K-1 income and investment income. All that feeds into my personal income statement. And I’m just going to put down just kind of a ballpark figure. I don’t care if you make way more than this or if you make way less than this, but we’re just going to assume that this individual, for our hypothetical scenario, all things considered, as making maybe like $300,000 of gross income from all sources, from their job, from their business, from their investments.
Once again, that number doesn’t really matter. But we’re going to assume that this person has $300,000 of income, and of course, this is gross income. So then whenever it comes time to live our life, we’re going to have expenses owed, of course, on this income. And so in the expense column, underneath the income side of the statement, of course, a big one is going to be lifestyle expenses.
Nate Scott [05:16]:
I’m going to talk more about that in just one second, too. But we can also throw like, hey, if I’m making $300,000, I’m going to owe taxes. I’m going to owe a lot of money in income taxes. And then, of course, I personally am a big believer in the power of giving and charitable giving. So of course, you know, that would be included kind of as an expense in the budget.
The idea is that an expense is anything that takes that whenever you, whenever you write the check or swipe the credit card, the money’s gone and there’s nothing you can do to get it back. It’s a true expense in our life. And, you know, some expenses are better than others.
Nate Scott [05:50]:
Like, I think, charitable giving is more of an investment than anything, but nonetheless, you know, it would be classified as an expense. And to make it a bit more clear, I just wanted to understand that lifestyle expenses, whenever I throw that word down, I just mean, like, everything that you’re spending money on, like whether it’s– I’m going to throw in a couple of items here, but lifestyle expenses are your home, your car, your vacations, your utilities, your eating out.
I mean, just everything you want to do, of course, can be summed up as lifestyle expenses. But the reason why I wanted to make a note to include a mortgage as a lifestyle expense and car as a lifestyle expense is because technically speaking, I’m aware that some of that can actually be kind of included on your balance sheet. But I’m going to go do more of the Robert Kiyosaki model and just kind of ignore the fact that you do have a, like, if you have a mortgage, you do own a piece of property.
But since it’s not like a cash flow producing property, I’m not going to call it an asset just to keep things simple. And the same thing is with a car. I know that whenever you, let’s say you borrow money to buy a car and you’re making car payments, there technically is like an asset and liability, like the car has some value and there’s a loan.
Nate Scott [06:56]:
But we’re just going to essentially say that, hey, cars wear out and there’s going to be an expense. Whether you pay cash, whether you use credit, we’re going to need another car someday. And so there’s kind of a set expense in the budget that has to exist to account for that. And so that’s just all what’s called lifestyle expenses.
And I’m going to assume that this person’s lifestyle expenses, lifestyle expenses plus taxes, plus charitable giving is we’re just going to make a nice even number and say it’s $200,000. If you’re making 300 grand, you’re going to have to pay a decent amount of tax. You’ll be doing some charitable giving.
Nate Scott [07:31]:
You have lifestyle expenses. Just to keep the numbers simple, we’re just going to say that there is $200,000 of expenses. What’s going to occur is at the end of every year, at the end of every month even, there’s going to be a net effect that’s happening here. And of course, we would say the net income of this person,
I mean, the income is 300,000, but, like, the net amount left over for us is going to be $100,000. And the term we’ve been using to classify this $100,000 is a term that we call free cash flow. Free cash flow. That’s the term I’m going to use to describe this amount of money, this net income.
Nate Scott [08:20]:
Essentially, what’s going to occur is we lived our lifestyle, we paid Uncle Sam, you know, we gave money away, and we’re left with $100,000 in this instance. It could be more, it could be less in real life. That is not essentially what the– And the free cash flow is not being spent. It’s going to be saved. It’s going to be invested. It’s got to do something.
Nate Scott [08:39]:
This $100,000, we don’t need it in our expenses. Essentially, this is how the income statement and the balance sheet start to talk to each other. Essentially, this is how it works. Anything that’s left over as a net free cash flow in your life, it transitions from the income statement to the balance sheet. That’s what’s going to happen.
So as this year winds down, you have all this income coming in, you have expenses going out, and you’re going to have this net of $100,000. Every year, that money transitions to the balance sheet, and the new year starts next year with a clean slate. This $100,000 that you had as a net free cash flow from last year, is no longer involved in the income statement at all. It moves to the balance sheet.
Nate Scott [09:28]:
And this is going to be very, very important for our discussion on infinite banking, how it impacts these things. Essentially, what I’m trying to say is, whenever we have a free cash flow of $100,000, if we’re really bought into infinite banking, we would really love for that to be paid into a policy. We would love to get that money working inside of our own infinite banking system.
But all I’m trying to say is you’ll notice that this $100,000 at the end of the year, essentially what’s going to happen is it’s going to move to the balance sheet. So let’s move to the balance sheet side of the equation now, real quick, and I’m going to list out your typical assets that you would find. Like all of us, we would have cash, we’d have cash value inside of our life insurance policies. If you’re practicing infinite banking, maybe you own some real estate, maybe you have some retirement programs, iras, things like that that you could call an asset.
Nate Scott [10:21]:
I mean, we keep going down the list, but these are kind of the big ones. Maybe you have just some basic mutual funds or stocks or things like that that you own in your portfolio. And all of these would be assets on the balance sheet. And what I’m trying to say, by the way, is that once you’ve lived your life, this $100,000 is going to move and is going to start impacting your assets somehow.
But it’s no longer a part of the income statement. It’s no longer like, in other words, if I put that $100,000 into my mutual funds, I’m not going to call that an expense on my income statement. It’s a balance sheet transaction, and we’re going to dive into that. But the same thing should be true.
Nate Scott [11:01]:
If you decide to pay a $100,000 premium, we’re no longer inside of our income statement. We’re no longer. It’s not like it would be called an expense on the income statement. It’s actually going to all happen in a transfer of money that’s going to exist on the balance sheet. So, of course, assets are all the things that we’re pretty aware of. The same thing goes for liabilities. I mean, we could talk quite a bit about all this. Maybe you have mortgages on your house, maybe you have mortgages on your real estate.
Nate Scott [11:31]:
Maybe you have credit cards. Maybe you have student debt, maybe you have investment debt, all sorts of things that could be involved in the liability section. Of course, that’s a little bit easier to define. But what I want to do now that we’re going to make a transition to kind of a focus on more of what infinite banking really is going to be doing on our income statement and balance sheet, I’m going to go clear up the slate here, just kind of walk through a nice, clean slate.
So I’m going to erase all of what I’ve already put down here, and we’re going to start fresh with this asset. So essentially what’s going to occur, and we’re going to make a couple of assumptions. What’s going to occur is we’re going to assume that you’re an individual and you have $100,000 already in cash value, and that’s sitting here on your balance sheet as an asset. You have $100,000 of cash value sitting here on your balance sheet as an asset.
Nate Scott [12:24]:
And you go through the year, you earn $300,000 of income, you have $200,000 of expenses with lifestyle, taxes, charitable giving, all of that, and you’re left with a free cash flow of 100,000. That money is going to move from your income statement and is going to start to accumulate on your balance sheet and a lot of times what occurs– So now we have a new $100,000 and we’re just going to call it that. It’s sitting in cash.
So this $100,000 moves off of the income statement and moves to the balance sheet. We’re going to call it in cash. And the reason why I say that is because most people, like in our bank account centered lifestyle, a lot of times, as we have this free cash flow, it accumulates on our balance sheet in the form of checking account and savings account cash. Until we decide what to do with that cash and move it around within our balance sheet, that’s what’s going to happen.
Nate Scott [13:19]:
So we will then direct this $100,000 of cash that’s now on our balance sheet. We’ll move it into assets however we see fit. Once again, we’ve done income and expenses already, and we’re only dealing now with the money that’s left over, that we’re going to move around our balance sheet.
So we’re going to assume in this case, and we’re going to keep it really simple. I know in real life it’s going to be a bit more complex. We’re just going to assume that this person now has $100,000 of cash on their balance sheet, and they’re saying they’ve listened to Nate. They really like infinite banking. They’re like, I would like to move this cash into my policies.
Nate Scott [14:00]:
Well, of course, the only way to do that is to pay a policy premium. But once again, that premium is not an expense that exists over your income statement. We’re just moving money around. And so we’re going to assume that they pay this premium. And just to keep the math simple, we’re going to assume that they pay a premium into a policy that’s been around for a year or two.
And we’re just going to assume that this cash value is, you know, the policy is growing by what we’re contributing to it at this point in time, just to make things simple. So we paid this premium with this cash money that’s sitting on our balance sheet this year, and now we have $200,000 of cash value and technically $0 in cash because we just moved all the money into our policy ash value.
Nate Scott [14:44]:
But if you’ll notice, our net worth, our balance sheet didn’t even change. The day before we paid this premium. In our hypothetical scenario, we had 100,000 of cash value and $100,000 of cash. So we had $200,000 of assets. Now that we paid this premium, all we did was move money. We have the same net worth. We just moved 100,000 of cash into the policy. The only way to do that is to pay a premium, really.
Nate Scott [15:13]:
And so now we have $200,000 of cash value, no cash. And, of course, we’re simplifying it by assuming that the cash value is not going to be earning any interest, and we’re just kind of keeping it real simple. And so, but with this being said, let’s continue down this track. Once again, we’re beyond. We haven’t impacted our income statement at all by paying this premium. It’s all being done on the balance sheet through just transferring money. That’s all we’re doing at this point in time. It’s not talking to the income statement when we start, when we pay premiums.
Nate Scott [15:40]:
The same thing is going to be true of a loan repayment. But let’s go ahead and talk about this. Let’s say that this person is an investor or they have some sort of deal come their way that’s going to need $100,000 to take advantage of, and we have $200,000 of cash value inside of our policy. Well, what we’re going to do is we’re going to take a policy loan out of $100,000 to take advantage of this investment opportunity. Let’s just call it like a piece of real estate or something like that. Like a down payment on a piece of real estate. So what we’re going to do is borrow $100,000. Now, if you’ll notice actually, this is what’s interesting.
Nate Scott [16:20]:
It’s not too confusing, by the way. And whenever you think about a balance sheet mentality, we still have $200,000 of cash value, right? We still have $200,000 of cash value. We just now have added a liability to this section. Now we have a $100,000 policy loan inside of our inside of our policy. But that policy loan is going to be used to fund this real estate purchase. So now we have $100,000 on the asset column that’s called real estate that we used to not have at that time.
Nate Scott [17:26]:
So if you take a snapshot of where we’re at, we used to have $200,000 of cash value and no liabilities and no other assets. Now we’ve just been moving money around. We borrowed $100,000 from the policy, which created a policy loan, which we can add to the liability section, but then we use that to go buy a piece of property. So now we have on our asset side, $200,000 of cash value and $100,000 of real estate. So $300,000 of assets and a $100,000 policy loan.
Nate Scott [17:57]:
That would be kind of on the liability section. So what are we left with? Well, just right now, in a simple way, we’re just left with the same net worth, the same $200,000. All we’ve done is move money around on the balance sheet. As you are positioning where you really want your wealth to start to accumulate, that’s all we’re doing.
There’s nothing happening right now on the income statement thus far. And as I said, this is why people get very confused, is whenever you start to classify policy loans and policy loan repayments and policy premiums as expenses on your income statement, things start to get really, really wonky mentally.
Nate Scott [18:41]:
And oftentimes really, the net effect is just that people end up having a much smaller scale system than what they would actually enjoy having, just simply because they’ve been misclassifying things and they’re trying to keep expenses low. So this policy is a liability. It’s an expense. I don’t want to have more liabilities, more expenses, but they don’t really see it for what’s actually happening.
But let’s go on and take it one step further, because it is true that your income statement and your balance sheet will talk to each other. So let’s just assume now that you have this $100,000 investment in real estate and this real estate is going to be producing income. So we’re just going to assume that maybe this piece of real estate produces a $10,000 a year income to this individual to make it easy. Well, now, as you can see, this is how assets and the balance sheet and the income statement start to talk to each other.
Nate Scott [00:19:32]:
Because now what’s going to happen to my income? I used to make $300,000 a year, but now I own this new asset that’s producing a profit of $10,000 that I used to not have. So instead of me making $300,000 a year of income, now, of course my income is $310,000 per year. But keeping things simple, now that I have $310,000 a year, what’s actually changing, though, on my expenses thus far? We would say really nothing.
Nothing’s changing. My lifestyle, taxes, all those are going to be the same. I know we could mess around maybe having some slightly increased tax, but maybe not, because it depends on appreciation. But I’m not going to go into all those details. I’m just merely saying at the end of the day, we just created $10,000 of income into our, into our income statement from this asset.
Nate Scott [20:18]:
But we didn’t really have to create a brand new expense alongside it. So now I have $310,000 of income and 200,000 of expenses. What’s happening to my net income? What’s happening to my free cash flow? It used to be 100,000, but we’ve added 10,000 to it. Now we have $110,000 of free cash flow. So let’s play it out for this next year, this next coming year.
Instead of having $100,000 move from the income statement to the balance sheet. Now we have $110,000 moving from the income statement to the balance sheet. And so if I erase this just to kind of get back to normal, by the way, the year before, for those of you listening and not watching, you know, we had $200,000 of cash value and $100,000 of real estate. But now what we’re going to have is another $110,000 of cash sitting here as an asset, a brand new asset created by, you know, as money moved, maybe this was like almost 10,000 a month was moving each month away from the income statement and moving towards the balance sheet.
Nate Scott [21:23]:
And so we have $110,000 of cash sitting here. What are we going to do with this money? Once again, what are we going to do? This money has to be somewhere. It’s already here on the balance sheet. And now we’re done with income and expenses. We’re done with the income statement. Now we’re just maneuvering our money as it’s becoming available, as it’s moving from the income statement to the balance sheet to build wealth. And we’re maneuvering money from within just where we want to hold it.
Nate Scott [21:48]:
So, of course, we’re going to assume this person wants to continue paying premiums and building their bank. And so we’re going to assume they put another. They paid their policy, put $100,000 of this cash into the policy. So now we had 110,000 of cash that moved from the income statement.
Now we only have 10,000 of cash, but our cash value, once again, assuming no interest and dividends being earned, just keeping things very, very simple, we have 300,000 of cash value and $10,000 of cash. So you take a look at this, and, yeah, we have 300 grand of cash value, $100,000 in real estate, and $10,000 of cash. So the total assets are $410,000. And we still have our $100,000 policy loan.
Nate Scott [22:35]:
The question is, what are we going to do with this $10,000 of cash now that it’s sitting in our balance sheet? Maybe we don’t want to have this money sitting in cash, right? We’d rather it maybe be in policies or be reinvested. So we’re left with a couple of options. We could choose to take this $10,000 and start to pay down the policy loan balance. We could do that. We could take this $10,000. We could start a brand new policy on one of our kids or something like that.
Nate Scott [23:01]:
If we wanted to, we could take that. I mean, in other words, we’re over here on the balance sheet now. We’re just maneuvering our capital that exists here, and we’re just doing whatever it is we want to do with it, and it’s up to you.
In this example, let’s just go ahead and assume this person took this $10,000 of cash that’s now sitting on their balance sheet, and they just chose to repay the policy loan balance and reduce that down from 100,000 and take the ten grand and reduce it down to 90,000.
Now, by the way, I’m fully aware that the policy loan balance would have interest owed on it as well. But once again, this is for simplicity’s sake only. And the reason I say that is because we’re also not assuming that the cash value is increasing with interest and dividends the whole time. We’re not assuming that the real estate is appreciating in value or anything like that.
Nate Scott [23:53]:
I’m just saying we’re keeping things simple. I mean, we could get as complicated as I want. Some people just get so weird about the nitty gritty details that they lose sight of what we’re actually trying to teach. So what I’m trying to bring up, though, is that it’s still all occurring over here on the balance sheet. We’re maneuvering money to do what we want it to do.
At the end of the day, now that we have paid this policy loan back, what is our net effect to our balance sheet? Remember the day before we paid this $10,000 loan repayment to the policy loan, we had $300,000 of cash value, $100,000 in real estate, and $10,000 of cash. We had $410,000 of assets and a $100,000 policy loan. Now, we don’t actually have any cash.
Nate Scott [24:40]:
Again, we’re back to having only 300,000 in cash value and 100,000 in real estate. So $400,000 of assets, but we don’t have $100,000 in liabilities. We have 90,000. So our net effect is still the same. We have a net worth of $310,000, right? I mean, that’s just what the net effect is. After all the dust settles and all we’ve done is maneuver money.
Nate Scott [25:05]:
Remember that policy loan repayment we made? That wasn’t a brand new expense. That’s just a movement of money that’s existing on the balance sheet. That’s the easiest way to kind of understand what’s going on.
Here’s where things can get a bit tricky, though. So that was kind of easy for an investment, some people might say, well, Nate, you know, what if we were to kind of erase this policy loan and just kind of restart with a new thing? Well, here’s what I’m aware of, of course, that you can use policies to do things, to fund things that are a part of your lifestyle.
Nate Scott [25:42]:
But what I’m trying to say is it’s not going to add anything new as far as your income statement that wasn’t already being accounted for, or at least it shouldn’t. So here’s how this kind of works. So let’s say it wasn’t for a piece of real estate that we took this policy loan for.
Let’s say we were going to borrow $50,000 to buy a car. So we were going to borrow $50,000 to buy a car on a car loan. And what I’m trying to describe here is that this car, the expense of having this car, we’re just going to say maybe we pay $1,000 a month on this car. What I’m trying to get to is that technically, as we said over here on the income statement, there’s already an expense in existence called car expense.
Nate Scott [26:23]:
Like we know cars wear out. And whether you drive a car for five years and then you go replace it, or ten years and go replace or whatever it is, there can be a set expense that’s going to be required as part of your income statement for the use of this car. It’s a depreciating asset that’s got to have to be replaced. So there is going to be this thing called car expense.
And in reality, if I was to borrow money, let’s say, from my policy, let’s say I have 300,000 of cash value, let’s say I’m going to take a $50,000 policy loan from that policy, from the policy to fund it. It’s actually really not any different than if I had just borrowed money from a bank to fund this car. That’s where I wanted to get rid of the magical thinking of IBC. By the way, there is benefit, of course, to using policies to pay for things. A huge one is just the total flexibility in loan terms and loan repayment terms, as opposed to, like, a set amortized loan with a car.
Nate Scott [00:27:21]:
But at the end of the day, on the balance sheet it actually looks the same, by the way. So, in other words, if I had $300,000 of cash value and $100,000 in real estate. So I have 400 grand of assets. And if I was to borrow money from Bank of America to buy a car, there would be a new $50,000 car loan with a payment there.
And it is true that the income statement and the balance sheet talk to each other, but what I’m saying is we’ve already accounted for this car loan, quote, unquote, as an expense, as part of our lifestyle expenses. It has to be there already. In other words, whether you do infinite banking or not, there’s going to be a car expense. Whether you pay cash or you finance a car, there’s going to be a car expense.
Nate Scott [27:57]:
We’re all just choosing how we’re going to pay for that expense and then how we’re going to treat it. So if I pay cash for a car, I’m going to have to refill the bucket over time to be able to pay cash for the next car. If I chose to finance the car with a bank, then I’m going to have to pay the bank back, and then I’m going to go buy, you know, it’s going to be paid back, and I’m going to go buy another car and keep paying the bank back. If I use a policy, it’s the same type of thing. It’s like I’m refilling the policy bucket so I can do it again. But that’s called a lifestyle expense. The idea that you’re doing IBC and creating something that’s brand new is not exactly true whenever you actually look at reality.
Nate Scott [28:30]:
So that’s what I wanted to say here, is that it’s all like, let’s say the $1,000 a month payment that’s being made on this car loan, that is a real expense in your lifestyle. At least it should be. But just because we added a new loan to the books doesn’t really mean that we’re changing. We’re adding a new expense that used to not exist.
So this is where people get weirded out, especially for things like maybe vacations, maybe more so than cars. So somebody would say, well, like, Nate, why would I use my policy to fund a vacation? Now I have to repay this vacation, and it’s like I’m adding a new expense to my life, and we’re saying, well, hold up, hold up, hold up. Time out real quick. That would imply that you never want to go on a vacation again, right? So, like, if you’re someone, of course, like most of us who, you know, go on a vacation and just pay for it with cash.
Nate Scott [29:19]:
We all, I think, subconsciously understand that we have to, like, we paid for it. Let’s say we went on vacation in July, but we always go on vacation in July. And so next year, I’m going to have to magically somehow have the money to go on that vacation again. That has to be built up someplace. So if I pay cash for it, I’m going to slowly be building back up my vacation money.
Whether it’s consciously or subconsciously that’s what’s going to happen, so I can go do it again next year. It would just make logical sense if I was going to borrow money from my policy to do something that exists in my lifestyle, I’m just going to be using that normal lifestyle flow to pay back the policy loan because I. I’m going to pull from the policy to go do it next year.
Nate Scott [30:03]:
So what I’m saying is it didn’t add a new expense. Most of the time, what people mean is that I used to not like, have to repay anything. I have to do this repayment, and they put it on the expense side of the balance sheet, and they kind of treat it in a way that it really shouldn’t be treated. Oftentimes they assume that I’m adding new expenses to my life.
And the whole point of this presentation was to say that when you start to classify policy transactions primarily on the income statement and expenses. Primarily, that’s where it would go and rightfully so. Like, we all have car insurance premiums, home insurance premiums, you know, disability premiums. I mean, all these premiums that we have for insurance, those are real expenses.
Nate Scott [30:46]:
I mean, those live on the expense side of the income statement. They don’t affect the balance sheet, right? They don’t affect anything over here. They’re just regular traditional expenses that reduce my net free cash flow. But really the only type of insurance that is not living on the expense side but actually does impact positively the balance sheet of someone’s life.
It really is permanent life insurance, dividend and paying whole life insurance used for policies. And so what’s being used to fund policies is all of the money that’s existing on the balance sheet, it’s the free cash flow that’s going to move to the balance sheet, or it’s money that’s already on the balance sheet already that’s going to be used to fund policies.
Nate Scott [31:30]:
None of that is adding a brand new expense to your life. It’s just maneuvering money that already exists in your balance sheet side of the equation. And then whenever we borrow money from policies, there really is no net effect. And when we repay money to policies, there’s really typically no net effects to your overall balance sheet. We’re just moving money around. The same thing goes for paying premiums and things like that. So I hope this does a decent job of clearing it up. I could go into more detail, but I think this is good for today is just really understanding that.
Nate Scott [32:08]:
The key takeaway is that our goal as building wealth, as individuals, is to see our assets produce more value in our lives and increase in value over time. And policies are just a really great place to operate.
The growth of wealth that’s occurring so that as we receive free cash flow from our income statement, because we live on less than we make and there’s money left over, that money becomes capital in our life, it sits on the balance sheet, and then we direct what we want it to do on the balance sheet side of things, in which case, that’s where loan repayments live.
That’s where policies, by the way, like policy loan repayments, live over here on the balance sheet. The same thing goes for premiums. They live over here on the balance sheet. They impact the balance sheet of our life.
Nate Scott [32:57]:
So I hope this has been helpful. If you start classifying the transactions the way they’re supposed to be classified, I think everything will start to make more sense and seem less magical and hopefully more valuable to you.
So anyway, it’s been so good to have you guys here. It’s always fun to shoot these episodes if this is meaningful content to you. If you’re enjoying it. If you wouldn’t mind leaving a comment liking, subscribing, sharing these episodes. It’s how we get the word out that this is a worthwhile show to listen to. So thank you guys so much.
Nate Scott [33:26]:
This has been Dollars and Nonsense. If you follow the herd, you will be slaughtered. And by the way, if you want to take a deep dive into infinite banking, I created a free course on our website. You can get there by going to livingwealth.com/escapethebank and sign up for free. I really do think it’s like the best course from getting A to Z on infinite banking that you can get, and so it’s impacted a lot of people very well. Once again, go to livingwealth.com/escapethebank to take the course and we’ll see you there.
