One of the prevailing mindsets in the world of personal finance is the idea that "cash is king." The promoters of this idea say that the wise steward should save up and pay cash for major purchases to avoid interest costs from 3rd party lenders. I'm not here to disagree that this is a better approach than the typical financing package from a car dealership or local bank. However, what is left out of this equation is that there is still a cost associated with paying cash. An opportunity cost, to be more specific.
In the financial world, a very common question is "compared to what?" Each decision we make is not necessarily good or bad until we compare it to our other options. Paying cash looks good compared to paying a high interest charge to borrow the money. Paying cash compared to saving and earning interest on that money for the rest of your life presents a different picture.
Let's look at an example. If I pay $30,000 cash for a new-to-me vehicle (wish I could say new...but these prices today--whew!), I have saved whatever interest charge I would have paid a lender, but what future value have I given up? Let's say I was able to save that $30,000 for the rest of my life and earn a conservative 3% interest on it in a savings vehicle with little to no risk. In 30 years, that $30,000 would have grown to $72,818. My opportunity cost for paying cash was $42,818. In 50 years (assuming the good Lord keeps me around that long), my opportunity cost grows to $101,517.
Now there is an obvious challenge with letting all of my money grow for the rest of my life--there are things I need to buy! We will always need to finance purchases, whether we pay interest to someone else, or give up interest that we could have earned when we pay cash. What, pray tell, is the solution to this conundrum? What if there was a system that allowed me to save up my money and allow it to grow and compound for the rest of my life, while simultaneously using it for the needs and opportunities of life?
Enter the Infinite Banking Concept®.
Nelson Nash, the creator of the IBC, realized that we can solve the need for financing in our lives in an unconventional manner. Instead of turning to the commercial banking system, we can create our own system using dividend-paying whole life insurance from a mutual company. He realized that these companies already have everything in place to set up a personal banking system: banks provide a place to store money, and so do life insurance companies. Banks provide loans and receive loan repayments. So do life insurance companies. Banks make a profit on those transactions and those profits go back to the shareholders of the bank. Insurance companies make a profit on those transactions and those profits go back to the policy holders.
What is the net effect of changing where you "bank"? You create a system in which your money grows (and can be accessed tax-free, by the way), compounding for life, while you collateralize those cash values to use the insurance company's money for literally anything you need. You're only limited by the same constraint you would have saving at the bank: how much you have put in.
A note of clarification here: there is always a cost to capital. In this system, when you borrow the insurance company's money, you will pay them interest. However, you are recapturing the opportunity cost associated with paying cash. So in our $30,000 car example above, you might borrow that money from the insurance company and pay 5-6% for whatever term you decide (yes, YOU get to decide that). So perhaps you pay them $4-5,000 in order to recover the opportunity cost we discussed above. $5,000 for $101,017. I'll take that all day long. Keep in mind that this is just one purchase. Imagine if you could recover this lost opportunity cost with every major purchase of your lifetime?
If all this is true (and it is), how much would you want to put into such a system? I think the answer for most critical thinkers would be as much as possible! Maybe the financial infotainers had it almost right. Maybe it's not cash that's king, but cash value inside a dividend-paying whole life insurance contract.
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