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Be A Banker To Yourself – My Way Of Infinite Banking Account

Once I wrote about an Infinite Banking strategy in my “Be a banker to yourself” article. It was a brief review of this strategy. Today I would like to show you how I use this strategy but without a whole life policy behind the “Infinite Banking”.

What Is Infinite Banking?

If you do not want to read my previous post about Infinite banking, let me provide you with a quick review what is this strategy about.

The main point is to open a whole life insurance policy which will allow you to take a loan from the policy. Then you build the account in about a 5 year-long accumulation phase. You pay your insurance premium and on top of the premium you pay a contribution to the investment part of the policy.

After 5 years you should be allowed to take a loan from your policy and you pay the loan back with an interest. The smart and cool part of this strategy, which I like the best, is that you pay the interest to yourself.

With this strategy you can then avoid taking expensive loan from a credit company or a bank. You are a banker and credit company to yourself.

Infinite Banking 2.0

In my previous article I mentioned that I didn’t like the whole life insurance policy behind this strategy and that I wanted to modify it.

For that reason I created two accounts: 1) savings account; and 2) brokerage account. The savings account would allow me to tap into the reserves in case I need fast loan, the brokerage account is more like money making machine making me a lot larger interest rate. I will write about my rules (for example 30% loan rule and contributions) into these accounts in my next post.

If I need cash, I can borrow money from my savings account and later start paying it back.

This approach requires a lot more discipline than when you use your insurance company as your loan processor. I remember practicing this strategy earlier in my life, but because of lack of discipline I never paid the loan back and depleted my reserves.Infinite banking

It is a lot easier when you have an insurance company lending you money from your account (or taking a loan from your 401k) and then receiving a bill every month demanding a payment for the loan every month. If you are at least a little responsible saver, you most likely pay the bill. If not, you get hit with a large penalty.

When you are a lender to yourself, you will not print and mail a bill to yourself and then write a check and mail it back to yourself, so it is easy to skip this process and stop paying if you are lazy like I am.

I have my own experience with this already.

Taking a Loan

I need to replace my windshield. I was driving with a broken windshield for some time but last Friday I got pulled over by a cop so I think it is a time to really replace it. We live in a small town so there is a quite big chance that the same cop will pull me over again and he will no longer eat my excuses.

Although I usually save cash for expenses like this, I do not have money saved for this expense. I currently save for my tires replacement, but that’s it.

So I decided to use an “Infinite banking” strategy and take a loan from my reserves.

Balance And The Procedure

As of today, I have $2,331.09 in my savings account and $735.72 in my Scottrade emergency account.

I will be taking a $300 loan from my savings account for 24 months.

My average interest rate on both accounts (dividends and interest) is 8.88% and the interest rate to myself will be 13% annually.

Then I go to Yahoo! page and under “Personal Finance” tab I open a “What would my loan payments be?” calculator.

Loan Calculator

As you can see, I filled in the amount I want to borrow, interest rate, term of the loan and that I want monthly payments. The table below shows the results:

Loan Results

From the table above I can see that I will pay additional $14 monthly on top of my regular contributions to pay the loan off. Right now I pay $15 monthly to my savings account and $120 (70 dollars is my contribution and 50 dollars is my wife’s contributions) to Scottrade account. After I take the loan I will contribute $29 monthly to my savings account while still contributing $120 to the Scottrade account.

To make things easier I will set up an automatic deduction from my checking account to make sure this loan will be paid off.

It may look complicated to some people, but I believe, this is a good strategy to eliminate credit card debt or any other expensive loans and be borrowing from yourself and making money or saving more money by paying to yourself when borrowing cash.

What do you think? Does this strategy make sense to you? If you are taking money from your reserves, how do you treat it? Do you pay it back or just continue contributing as before hoping that one day your contributions catch up with original balance?

Thanks for visiting and posting your opinion on this!

Disclaimer: The strategy described above and in this “Infinite Banking” series may not be suitable for everybody. The strategy expects the investor knowing and having extended experience in trading stocks and options. The strategy above is not a recommendation or solicitation and if you decide to follow it, it is solely on your own risk. The strategy above only describes my approach to Infinite banking. Refer further to this Disclaimer.

Image courtesy of Phaitoon / FreeDigitalPhotos.net

 





12 responses to “Be A Banker To Yourself – My Way Of Infinite Banking Account”

  1. Stan P Cox says:

    Aloha All!
    I see this is a pretty old article, so don’t know if anyone will see this… But, Martin (?), if you are the author of this article, apparently you had worked with an agent who either didn’t know how to design a proper Infinite Banking Account, or they were just more interested in making a commission on what they sold and were just using the IBC idea as a sales tool.

    I actually specialize in Infinite Banking and design accounts for clients where 60% or more of the 1st year’s premium goes into the cash account and is available to leverage as soon as the money is deposited. So, most of my clients front load their accounts and start making policy loans right away – not having to wait at all – let alone 5 years for funds to accumulate!

    The point another commenter made is that when you take money out of savings, it no longer receives any interest – compounding or otherwise. Besides, are you making ANY interest on your savings account? What – 0.5% ?? The minimum compounding interest on my client’s whole life cash accounts is 4% compounding, and currently 6% with the dividends. So, Infinite Banking with a properly designed account with the right company is WAY more financially productive than using any other accounts or combination of accounts. There is NO risk of LOSS with whole life as the is with investment accounts.

  2. John says:

    Every time you borrow from your savings account you break the compounding of interest. Regardless if you pay back with interest, the uninterrupted compounding is much more powerful in the long run. That’s why they use whole life. Remember you are borrowing from the insurance company, not your own money. Your death benefit is used as leverage and your cash compounds uninterrupted until you die. Imagine if you put 20k in the bank at 25 years old at 4% guaranteed added $400 every month? No taxes. No penalties. No risk of loss. Now How much would you have by retirement? $602,457. Contributions over 40 years would be $192,000. That’s a 213% total return non-taxable. That figure does not include annual dividends either. I don’t sell these accounts, I’ve had one for 10 years and it’s been a lifesaver in hard times. :-)

  3. Frank says:

    I actually have some spare money in my Lending Tree IRA and investment account that I’m considering lending to myself. Here is my thought: I request a loan from Lending Club and then basically invest that restricted money into my own requested loan. The downsides are this: the originating fee and the loan showing up on your credit (although that may not be a bad thing).

    • Martin says:

      Frank, I am not sure I follow you well. I understand a bit what you mean, but not sure 100%. Do you mean that you are lending money to yourself using Lending Club loans, or taking money from your lending club IRA account? I would consider the later as Infinite banking, because you are borrowing from your own account and paying interest back to your own account.

  4. Interesting strategy, I like it! Definitely makes sense.

    • Martin says:

      I like the strategy too although it may be difficult to follow it… But if you do, you and take a loan from your own account, you do not lose your interest and make money. I think it is a great way how to get rid of debt.

  5. Very interesting. I’m not sure this is for me, but I’m going to look a little more deeply at it. I don’t have whole life because of the very high cost of it and it affected my cashflow too drastically. Still, interesting. Wheels turning…

    • Martin says:

      Nick, that’s why I do not like whole life insurance and use my own savings account and brokerage account. The savings account is for quick cash and the brokerage is for higher return (using dividend stocks). It may be a bit riskier, but that’s what I am willing to do.

      Thanks for stopping by.

  6. I built a similar system to you, except I don’t charge myself interest. I just set a goal for my savings account and move more money into it per month the further I am away from that goal.

    • Martin says:

      I charge the interest because when I take the money out, it is similar to losing it (the interest). That’s why I like the idea. I pay it to myself and manage the deal the way it still is affordable (longer term of the loan for example).
      Thanks for stopping by.

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