Is it more efficient to finance your purchases with cash? Thanks to the Borrowing Strategy calculator, we can find out exactly how to optimize your financing strategies.
First, let’s look out over 30 years. There are no present value dollars, and we’ll contribute $10,000 a year. What we see over this time frame is an accumulation of $300,000. Think of this example like the “shoebox.” It’s not earning any interest, it’s simply being tucked away as is.
Now, assume we want to use these fund to purchase a car. In the first loan category, let’s put a loan of $30,000 in the fourth year. We’ll buy 6 cars total over 30 years, repaying each loan over 4 years, and let’s say the bank’s rate is 8%. Below, you’ll see what that payback schedule looks like.
Now, let’s say Dave Ramsey or someone comes along and says, “Why on earth are you financing cars with your banker? You’ve got all this cash sitting here, you could be saving money by not paying interest.” To show this, you’ll change the “Loan/Withdrawal Source” to Cash and put a negative 100 in the “Loan/Withdrawal Payback Rate.”
As you can see from the below, paying with cash from your account actually reduces your accoutn value to $120,000. By trying to avoid interest payments, you’re actually ending up with $48,000 less than if you had taken a loan.
So can you do better than that? Well, if you want to be an “honest banker,” yes. Being an honest banker is really about being principled in how you manage your money. If you finance something with your own cash, for example, you want to repay yourself so that you have more capital to use. When you have whole life insurance and use a policy loan, this process is somewhat automated, yet with your own cash requires diligence.
If you change the Loan/Withdrawal Payback Rate to 0, now you see it takes an annual deposit of $7,500 to get the account back to its “baseline” of $300,000. While that might suffice for some, there’s still more you can do to be an honest banker.
Think about it in these terms for just a minute: Do you think as highly of your family as you do your banker? I’m hoping you do, if not more so. If you do, why are you willing to pay your banker principal plus 8% interest, yet not your family? To rectify that, why don’t you simply pay yourself 8 percent? This would make your annual deposit $9,058 instead of $7,500.
When we do that, we see that now our account has gone up to $337,000 (shown below). Why? Because the 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.
Recently, we posted about how banks make money. We’re not quite there yet in this illustration, we’re starting to make some headway. And ultimately, that’s where we want to be—doing what the banks do.
So now, you have to ask, would you really settle for a shoebox account when you could ALSO be earning interest? You’ll still pay yourself interest, yet you’ll also be earning it passively. How does that sound?
To be on the conservative side, we’ll imagine this cash is in a CD earning 2.1%. While there’s an initial jump, we have to remember taxes, which we’ll put at 35%. This puts the account at $410,000 after 30 years, which is a significant improvement over $300,000 and certainly an improvement over $120,000.
To recap: in order to move more of the money over to our side of the ledger, we had to be an honest banker. That means storing cash where it can earn a rate of return, leveraging that cash, and paying ourselves back at the same rate we’d pay the bank. Yet, we can do even better.
This is where life insurance comes in, and it makes a good thing GREAT. The policy loan is truly the powerhouse of this concept because you can leverage the life insurance company’s money while your cash value grows uninterrupted. You get to do this without paying taxes on the money you borrow, and any time you pay down the policy, that much of your cash value is available to collateralize again.
To see what that would look like, you can load in stored life insurance data and set taxes back to zero. For this illustration, we’ll also assume that the loan rate is 6% instead of the bank’s 8%. As you can see, the account jumps up to $602,000 which is far above any of the other options. That’s the value of using a policy loan.
One of the best parts, again, is the ability to re-leverage your dollars over and over again–all while it continues to grow. This is how you can optimize your savings while also increasing your opportunities over time.
Interested in seeing other ways to make this calculator run? Attend a Truth Training, where we will dive deep into each calculator and how to use it efficiently in your life insurance practice.
