Sinking Fund, Lost Opportunity
One response I have encountered multiple times – and one I held myself when I was first exposed to the Infinite Banking Concept – is that in practicing the sinking fund method you avoid having a monthly payment while with IBC you still have a monthly payment.
This is only a half-truth, and it represents the change in thinking required for practicing the Infinite Banking Concept and the necessity of thinking long range.
If you recall in my previous article on Who Controls the Banking Function, I used the example of purchasing a $30,000 car and showed that you have three methods for purchasing it. A) Pay cash with the sinking fund, B) Finance with a bank loan, or C) Financing with your personal banking system.
In all three options you are spending $34,800 for your $30,000 car, over the first 5 years. You will spend $34,800 no matter what.
You can spend $30,000 now and give up earning $4,800 during that period (option A), or you can make monthly installments totaling to $34,800 to a bank: either someone else’s bank (option B) or your own bank (option C).
Yes, if you choose option A, it is true that you have not signed any loan agreement. You do not have a required monthly expense in the form of a loan repayment. But it is not accurate that you do not have any changes in your cash flow.
No matter what option you choose, a banker is involved – either you or someone else. If you choose to be the banker, whether practicing IBC or using the sinking fund, you must be an honest banker.
You cannot take $30,000 from your sinking fund and not replenish your savings account and expect the sinking fund to be there for the next purchase. You must also account for the time value of money and inflation as you replenish your savings account.
If you have $30,000 in savings and you spend it all on a car and you do not continue to put future cash flows into your savings account, then later when you need to replace that car you will still have $0 in your savings account. If you want to pay $30,000 for your next car you need to save about $470 a month with a 3% savings account. If you want the same car adjusted for inflation you probably need to save $545 a month.
Whether you are making a loan repayment or replenishing the savings account, future cash flow is required if you want to continue to drive a car. And that needs to be an increasing cashflow over time.
Like using the sinking fund method, financing your car purchase with your banking system does not have a required monthly payment. But like using the sinking fund method, you would be foolish to not have some sort of repayment plan.
But there are some other significant differences between the sinking fund method and practicing Becoming Your Own Banker.
Firstly, with the sinking fund method, you give up all the opportunity cost of money you have already earned. Dollars spent will never earn interest for you again. Like an employee you have fired, they will never produce for you again. By practicing the Infinite Banking Concept, each dollar continues gaining unbroken compound interest .
Untouched, that $30,000 could have earned you $4,800 in the first five years. Over 55 years it could have compounded to over $155,000. In an effort to avoid paying $4,800 to someone else’s bank (option B) or $3,600 in interest to your own bank (option C), you are giving up over $125,000 in opportunity cost. That is like stepping over a hundred-dollar bill in order to pick up a nickel.
Second, with the sinking fund your future cash flows are doing only one thing – restoring your savings account and you are spending an that $4,800 every 5 years, receiving nothing in return. Yes, each dollar added earns interest, but only for a short time until it is spent again.
By financing this purchase with your own banking system, your future cash flows do multiple things at once. First, each future dollar pays down the loan principal and accrued interest to the insurance company – a total of $34,800 paid in 5 years. Second, each dollar paid also restores the capital available for future purchases. Each payment simultaneously reduces the loan balance, the debt, and increases your “savings” balance (Net Cash Value). Compare that to the other methods – each dollar ONLY increases the “savings” balance (option A) OR only decreases the loan balance (option B).
Finally, each dollar buys Death Benefit protection for the beneficiary of the policies used in your banking system. If you die, the loan balance is subtracted from the death benefit and the remaining death benefit is paid out to beneficiaries. This means every loan you take is guaranteed to be paid off – even if you graduate (die) before the loan is paid off. The sinking fund is in effect replenished.
On top of that, the death benefit (future value) is necessarily greater than the cash value (present value). Not only does the beneficiary receive a replenished “savings account” but they receive significantly more.
Does your savings account provide any death benefit protection? How much does your family get from your sinking fund if you die – is your savings account replenished when you die? Is it restored multiple times over? Does the conventional finance advise of using the sinking fund method still seem like the best choice?
Semper Reformanda
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