You Finance Everything You Buy, Even When You Pay Cash

There is a book by R. Nelson Nash called Becoming Your Own Banker. The main purpose of the book is to demonstrate how the cash value of a Whole Life Insurance policy can be used as a source of financing anything in your life (i.e. cars, investments, houses, boats, etc.). The difference is that when using your Whole Life insurance, you are borrowing from yourself and paying interest to yourself in a tax efficient way, rather than borrowing from a third party (a bank), and paying them interest.

In Becoming Your Own Banker, R. Nelson Nash makes the following statement:

You finance everything you buy. You either pay interest to someone else or you give up interest you could have earned elsewhere.

Basically what Nash is implying is that when you purchase something with financing (i.e. you take out a loan to buy something), you commit to paying back the purchase price of that item plus interest over time. You are financing this item from a third party (usually a bank) and paying interest to them (not yourself). If you were to purchase that same item with all cash, however you are essentially missing out on other opportunities to have made a return in the form of interest on that cash.

For example, let’s say that I want to purchase a car that costs $30,000. I have two options. I can take out a loan from a bank to purchase this car and pay interest on that loan or I can pay all cash. If I pay all cash, that is $30,000 that I no longer have available to invest and earn a return on. Therefore, this purchase, despite having been paid in cash, is actually costing me more than $30,000 because I have given up potential interest that could have been earned on that cash, had I made another investment with it.

The Infinite Banking Concept

You’re probably thinking that, while this is an interesting way to think, it doesn’t really help you because, at the end of the day, you only have those two options in order to purchase anything. Nash would beg to differ. His method, called The Infinite Banking Concept, proposes a strategy whereby you can finance any product you want from yourself by borrowing against the cash value of your Whole Life insurance policy. Whole Life insurance is different from Term Life insurance. With Term Life, you pay a small fee every month. In the event that you pass away, the insurance will pay out a specific amount to your next of kin. Whole Life insurance works a little bit differently, in that it acts like a small investment account that builds a cash value. You as the owner of the policy can borrow against that cash value to make other investments while repaying the loan with interest to the policy (i.e. yourself).

Nash proposes that your Whole Life insurance act as a financing vehicle (a mini bank, if you will) for any purchase you decide to make in your life, whether it’s a car, house, boat, etc. Doing so, would allow you to not only purchase these big ticket items with cash, but it would also allow you to build wealth within the policy in the form of interest paid on the loan, dividends earned within the policy, and the cash value increasing simultaneously, hence, the Infinite Banking Concept. You literally become your own banker, without having to rely on a third party to finance your life. In this way, you can actually purchase something using cash while also making a return on that same cash. You essentially get to have your cake and eat it too!

These types of high level, borderline philosophical perspectives on the way we approach the use of our hard earned cash is essential for all investors. Being strategic about the way you spend your money on a daily basis is the only way to break free of the endless cycle of work, earn, spend, that hinders most of us from achieving true financial freedom.