Infinite Banking – Self-Financing with a Private Reserve
In this video, I discuss the most effective and efficient way of financing in your personal life or business, whether it be for cars, education, inventory, or to float your business until you collect on your accounts receivable.
Most people recognize the two primary options of paying for major capital purchases: paying cash, or financing. But there’s another option that allows you to keep your money earning uninterrupted compound interest and leverage against it, never depleting your resources. I call this self-financing with a private reserve.
When you pay cash, you build up capital first, then deplete your resources down to $0 equity to make the acquisition. The lost opportunity cost is the interest you could have earned, had you kept your capital.
When you finance, you purchase immediately, then use your resources to pay off the loan and get back to $0 equity. The lost opportunity cost is the interest you pay on the loan.
When you use a private reserve to self-finance, you build up capital, never giving up your reserves. When you make your purchase, you borrow against your capital as collateral, using other people’s money (OPM).
And here, we must deal with the stigma of debt. Debt does not mean you have a loan. Debt is a negative equity position, in which you owe more than you own, your liabilities are greater than your assets. If you have collateral to back a loan, you are not in debt, you simply have a loan with payments.
When you keep your capital earning, and finance a purchase, you’re in a stronger financial position, because you have cash that you can use to pay off the loan or to use otherwise for an emergency or opportunity. You also can qualify more readily for financing, and get more favorable terms on your loan, because the bank wants to see that you can pay them back.
On the contrary, if you’ve paid off all your debt, you’re in a position where you’re risky in the eyes of the bank for receiving a loan, because you have no equity, and you’re less likely to receive favorable terms on your loan if you qualify at all.
The bottom line: Don’t give up your cash, rather use it as collateral. All capital has a cost. The key is to find an environment where you control the terms and continue to earn interest, instead of only paying interest.
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