What is Cash Flow Banking?

Cash flow banking is another term for: becoming your own banker, infinite banking, private family banking, bank on yourself, your family bank, just to name a few. These strategies are about emulating the way banks earn money within the general economy; in addition to focusing on where you are giving away your wealth to others, like: taxes, interest, market loss, and inflation.

Becoming your own bank is not about rates of return; although having a competitive return is important, it is instead about controlling your money, being able to use it when you want, and having access to it when you want. It is a process, not a product. It’s about finding out where you are being inefficient and ineffective with your money and redirecting those payments back to an entity you own and control. It is about moving your money through assets, not to them, and getting multiple uses out of each dollar not having just one single use (for example, money tied up in a 529 plan for college, or a health savings account). You accomplish this by starting a “conceptual bank”.

Cash Flow Banking with Life Insurance

When it comes to starting your own bank. There are numerous products that you can use to store your money, just to name a few:

  • 401k
  • Savings account
  • CD
  • HELOC
  • Checking account
  • Money market
  • Dividend-paying whole life insurance
  • Mutual funds

Some of these options work well, and some work better than others. The key to cash flow banking is being able to continuously earn compound interest, even when you are using the money for something else, i.e. vacation, vehicle purchases, college for the kids, or an investment opportunity.

Now if you buy the everyday whole life insurance, you can still apply the banking principles, but that is the equivalent to racing a Clydesdale and not a Thoroughbred.

A key to the cash flow banking strategy is to design the whole life insurance properly. Normally, it is designed as death insurance, with the focus on death benefit; this makes the policy more expensive, because the costs are going to the insurance company. The best way for this to work, is to have the policy designed with as much of your money going into your policy with the least amount paying for the insurance part. This does two things; it lowers the cost of the insurance and lowers the commission to the insurance agent.

How Banks Earn Money

If you deposited $10,000 to a local banking institution, they could give you interest as a reward for keeping your money with them. They will in turn, lend money to someone else, say 5% for a car loan. That 4% difference earned in this example is called the “spread”. Banks earn at least five times the spread by using money over and over again. This is called the velocity of money.

Tying Cash Flow Banking to the Velocity Effect

family bankFor your conceptual family bank, you need a place to store your money, somewhere it resembles and is already set up like a banking institution. A properly designed dividend paying whole life insurance policy will act as your “warehouse”. Once you determine you want those funds to finance your next purchase (for whatever you want) you can draw upon your bank up to the available cash savings value (similar to home ownership and an equity line of credit). There is loan interest charged on the balance until that loan is repaid. However, since it is not your money you are using (you’re using a financial institutions money) the interest and dividends will continue to accumulate to the policy values and you will earn uninterrupted compound interest. This allows you the capability to employ the velocity effect, by keeping your money in motion and serving multiple purposes.

Let’s say an investment opportunity arises, or the roof of your house has to be updated, and you have your money in a 529 plan to help pay for your kids college. Well, if you were to access that money to take part in this opportunity, you will have to pay an egregious 10% penalty in addition to income taxes on your gains. Now if your money was in an entity that you own and control, which you have legal contractual rights to access without penalties, you could take part. With whole life insurance you could take cash as withdrawals from your policy, or use your policy as a line of credit by collateralizing the cash value equity. Or if you owned real estate, you could use the property as collateral and take an equity line of credit. Both the whole life cash savings value and the real estate property will continue to grow unaffected by the outstanding loan. A main difference between, whole life equity (the cash value you have access to) and property equity, is you do not have to qualify for access.
family bankWhat if you were to just pay with cash? Paying cash is better than going into debt. But when you pay with cash, you give up what you could have earned if that money was still earning interest. Overtime you will constantly be filling the tank, then draining it; never allowing compound interest to do its work because of the constant interruption.

why do i have to pay interest to use my own money?

You don’t. You are not using your own money. You are using your cash value as leverage (collateral). You see, insurance companies make many different types of loans, for example: bonds, mortgages, and/or policy loans. All of these accounts pay interest to the insurance company for the use of the company’s money, and that interest becomes part of their investment income. And because the policy owners outrank every other potential borrower in accessing the money that must be lent, they have control over the function of the policy’s cash savings value. Therefore, the insurance companies can only invest the monies if the policy owners do not exercise their contractual right to use the money themselves.

In closing

This has been an introduction to what cash flow banking is and how it functions. The key to this strategy is to act like a bank by using money multiple times, by keeping your money constantly moving, and by recapturing money you are transferring away to others.