IBC Gimmicks: Make Money Buying Cars?
The Infinite Banking Concept is not complicated. It is actually quite simple – accumulate your wealth in an asset that you have complete control over and that is guaranteed to increase in value. Then, through wise leverage, finance the things of your life – family, business, etc. In this you retain complete control over the terms of every purchase and capture the opportunity cost of those purchases.
It is simple, but it does require a paradigm shift and requires rethinking your thinking. Because changing how we think is difficult, many people feel the need to sensationalize IBC or they try and come up with analogies or explanations that reveal one truth but do also muddy the waters.
Still others will misrepresent it in order to disparage the concept to in favor of the conventional financial paradigm.
This is the second of a series of articles addressing some of these misconceptions, misrepresentations, or over-sensationalist statements.
One of the most egregious marketing gimmicks used by financial influencers and even experienced agents is that you can “make money buying cars” (or anything else).
It is claims like this, that don’t pass the sniff test, that make The Infinite Banking Concept™ sound like a scam or a get rich quick scheme.
This is like coming home from a shopping spree spending $500 and thinking you saved $100 because there was a sale. You didn’t save anything. Even if the purchase was necessary and it was made at a cheaper price, the amount of capital you have control over has still decreased.
All capital has a cost, and by spending cash you have also lost all the interest you could have earned on that money.
You cannot make money buying cars – even practicing IBC. You cannot make money buying anything. Buying things takes money – it is an expense.
Like all marketing gimmicks, there is a nugget of truth that has been distorted.
In practicing IBC, you are retaining control of your capital and, as described in the first article of this series, recapturing the interest that you would have paid to the bank.
As a recap – to “recapture interest” means two things.
First it means that some of the interest is directly paid to your banking system increasing the capital you have available.
Second, “recapturing interest” is referring to how the interest you pay to the insurance company is directly contributing to the profitability of a company you own and that increased profitability results in increased dividends paid to you by the insurer. This purchases more Paid-Up Additions which results in more death benefit and more cash value – more capital.
The claim that you “make money buying cars” is referring to the fact that by using leverage you keep the opportunity cost of the purchase of that car.
Consider a scenario where you were going to buy a $30,000 car.
You have the money saved up in a liquid account able to pay cash.
You have 3 options to pay for this car
- Pay cash
- Finance with a commercial bank
- Finance with YOUR bank.
First, consider that if you did not make the purchase, your $30,000 would have grown to $34,800 in the next 5 years. It also would have continued to grow to $73,000 in the next 30 years, $98,000 in the next 40 years, and $131,000 in the next 50 years. All at just a 3% interest rate.
By paying cash, you are giving up the opportunity to grow that money. $131,000 50 year cost minus the $30,000 cash price and you have isolated the finance charges – the cost of paying cash. $101,000.
Now consider the commercial bank.
If you financed the car with them at 6% for 5 years you’d pay $580 a month for 60 months, or $34,800. You’d pay $4,800 in interest. Mean while your savings account grew to $34,848 before taxes, or $33,832 after taxes.
Now, in years 6+ your loan is paid off and your $33,832 continues to compound.
In order to not pay a bank $4,800 you gave up all the interest that $30,000 would ever earn you. It is like stepping over a $100 bill to pick up a nickel.
Now consider the Infinite Banking Concept – financing with your private bank. Your next best option was to pay a commercial bank $580/mo for 60 months. Being an honest banker you are going to agree to do at least the same thing for yourself – because your money is more valuable than the banks. Anything else would be to steal from your business.
Favorable financing terms result in you paying off the loan with the 57th payment. Because you are an honest banker, you still make the remaining 3 payments to your bank. This results in an additional $1,740 of capital in your bank.
Additionally, the capital you have has grown tax-deferred. The capital available in your bank at the end of 5 years is $36,588.
In each of the 3 cases $34,800 was spent across 5 years. Either $30,000 of cash and $4,800 (and growing) of lost interest. Or $34,800 of future cashflows. But the end result is quite different across these options.
Did you “make money” buying this car? No.
If you did not have to buy the car you would have access to even more capital after 5 years. And neither will you “make money” buying anything else. But we have to buy things in life – we can’t just put every penny into savings.
This car was a purchase you were going to make anyway. You have not “made money” but in the end, you will have more capital available than your peers using a sinking fund or conventional banks.
If you’re ready to take control of the banking function, or just want to learn more, click to book a free call with an advisor today.
Veritas non verbum venditoris
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