So let’s look at something a little different here, and let’s go to the borrowing strategy, here if we take the borrowing strategy and let’s look out over 30 years, no present value dollars, let’s put in 10,000 dollar a year. Okay, so what we see over this time is $300,000 so let’s start with understanding the shoe box for just a minute and if we have this shoe box and we’re putting in10,000 ayear into it for 30 years at the end of the time frame we’re going to be at $300,000, but let’s say at this time we’re buying cars, so let’s go to loan one and put in loan amount of $30,000 and first year (4th year) and we’ll buy 6 cars. And we’re going to repay these loans over 4 years so over a 4 year timeframe and let’s say that the bank’s rate is 8 percent on the cars, so that’s not going to affect our account any. Our $300,000 is separate we also have this illustration where we’re going out and we’re buying cars from the bank.
But we see this and Dave Ramsey or somebody along those lines comes along and says “look, you’ve got this cash sitting here, why are you financing your cars with your banker?” So the suggestion is let’s change that and use our account. We can just take the money out of this account. Change to ‘Account cash’ and let’s put a payback rate put minus 100 so this is what people are taught to do and they feel like they’re getting ahead. And what happens is we went from $300,000 in our shoebox after our advice of paying cash down to $120,000 in our shoebox. Alright so Kim’s gonna keep track here of where we are when we started this. We started with $300,000 in our shoebox, we’ve got $120,000 after Dave’s advice but let’s think about this. We don’t need a life insurance policy to understand or do banking. We can do this with our shoebox.
The first thing we need to understand is be an honest banker, We need to at least payback what we’ve taken out. So if we do that, change that to 0 up there on the payback rate, now we’re back to our $300,000. So we’ve partially gotten there but the reality of this is, we’re still not being an honest banker. Now let’s think about it in these terms for just a minute, do you think as highly of your family as you do your banker and the reason I ask it that way is, if you were willing to pay your banker for the same automobile you were wiling to pay him principle plus 8% in interest but yet you’re not doing that for your own family? Now I know you value your family more highly than your banker but your actions aren’t really showing that. If we’re going to be an honest banker we need to payback at the market rate, you can even pay more than that, but at least the market rate and we see when we do that, we see that now our account has gone up to $337,000, why? Because that interest that would have gone to our banker is going to us, where it should. We’re starting to play the game of the banker.
We talked about that early on about how banks make money. And we’re not quite there yet but we’re starting to make some head way if we have this account here and we’re using it to finance our automobiles, would we really want to just settle for a 0% account? What if we could earn interest with the bank. Still be an honest banker and pay them back so let’s see what that does for us. So if we change our earning rate to 2.1 that was our CD rate that we saw with our bank we see it jump but reality is we’d have to pay taxes on that so let’s put on our tax bracket of 35% That moves us up to $410,000, definitely an increase. To start to understand banking, start to apply it to our finances we can start to move some of the interest and on top of that the earnings on that interest over to our side of the ledger. We’ve gone from $300,000 from the initial way we were saving money and buying cars down as low as $120,000 with paying cash but up now $410,000 taking advantage of CD rates of the bank and being an honest banker and paying back our market rate. Now we’ve been talking along earlier.
We saw what returns are with life insurance policy and how great it was. Many times we separate that out from out overall investment yet it’s all part of our saving and investing and there’s something that comes along with that life insurance policy and it’s a loan provision the insurance company because that is a fully collateralized loan another words, “that cash is mine”, I can put that up as collateral with the life insurance company and they will loan me money against it now I can take it out as cash but I lose some of the other benefits, but by borrowing against it the IRS let’s me put it back in the policy and I get to take advantage of long term growth that occurs. Let’s do that and let’s say the policy had a loan rate of 6% so go ahead and put 6 there load in the PLI values rate of return so bring in actual rate of return from the life insurance policy that we looked at earlier, so this is annual growth rate loss in front and all that, change from ‘Account cash’ to ‘Account loan’ what we see is now we’ve made jump up to $517,000 however do we have to pay income tax on the growth on this life insurance policy? And the answer is “No”. So we get to do this without the annual tax so moves us up to $692,000 so our life insurance policy already had a great rate of return and now we’re able to tack on some gravy thru using it as our source for funding, and reducing our dependence on financial institutions for loans and we get to apply interest back to ourselves. So we’re a long way from what Dave’s talking about, a long way from our shoebox yet it’s something we already have in place and something we haven’t been able to take advantage of.
Now we’re starting to move into maximizing the life insurance policy however when we look at this loan over here on the right side our column we haven’t come anywhere near using up the abilities of this life insurance policy. The beauty of the life insurance policy is as we pay it back it’s automatically available for us to borrow again -something completely different than what happens at the bank, payback doesn’t automatically entitle us to borrowing more money. Again so as soon as this gets paid back, we can borrow again, we may choose to pay this back at even a higher rate we can do that, and we can see what kind of impact that has long term when we start to take those types of strategies and apply them or put those into play.