Table of Contents
Introduction
The question often arises, should I pay off debt and then start IBC? This is a typical question for folks when they are contemplating the Infinite Banking Concept. Most people who discover IBC are people who are looking to do a better job managing their finances. Often it’s the burden of debt that has put them on the search that leads them to Infinite Banking in the first place.
Pay Off Debt by Rethinking Your Thinking
Traditional Advice on Debt and Savings
Mainstream financial advice typically suggests paying off debt first before saving. While this isn’t inherently bad advice, as no one enjoys carrying burdensome debt, high-interest consumer debt can be particularly draining. It simply doesn’t make good financial sense to carry a high interest rate credit card that is costing hundreds of dollars per month while we stash away cash in a savings account earning pennies at best. Outside of leaving a small sum for emergencies, it’s often better to use cash to pay off debt.
Infinite Banking: The “And Asset”
When you open a dividend-paying mutual life insurance policy structured for high cash value and start practicing the Infinite Banking Concept, a new way of managing cash flows becomes available. Infinite Banking is sometimes referred to as the “And Asset” because your dollars do more than one job.
By warehousing your wealth in your policy, one dollar of premium is giving you:
- Protection: Family security through a death benefit.
- Growth: Earning interest and dividends for life.
- Liquidity: Collateral to pay off debt.
This concept of giving your dollars multiple jobs at once is known as the velocity of money. Over time, dollars that are used in multiple ways work harder than a dollar simply used to pay off debt and then disappears from your economy.
Becoming Your Own Banker
The Transformation of Debt Management
When you use a policy loan to pay off third-party debt, you change your role in the financial play. Instead of being a consumer whose dollars flow to a lender, you become the owner of the debt—you are both the banker and the borrower. This transforms your debt from a liability into an asset within your private bank.
Banks make money from the stream of payments flowing to them from loans. By becoming your own banker, you replicate this process. When you repay your policy loan, including additional interest, you are the recipient of those cash flows. Moreover, you have access to those funds again for future needs or opportunities. The more times your dollars work for you, the better off you will be—this is how banks make money.
Benefits of Policy Loans
Using policy loans to pay off debt offers several advantages:
- Retain Ownership: You remain in control of your financial ecosystem.
- Interest Recapture: Pay interest to your policy, not a third-party lender.
- Continuous Growth: Your cash value continues to grow even when collateralized.
Paying Yourself First
Prioritizing Savings and Debt Repayment
Opening an IBC policy and then paying off your debt aligns with the principle of paying yourself first. This principle, often associated with budgeting, means setting aside a portion of your income for savings before paying bills. When you start an infinite banking policy, you are effectively paying yourself first by prioritizing your capital.
While this doesn’t mean neglecting debt, it involves a mindset shift: realizing that prioritizing savings is essential to break free from being a slave to lenders.
The Time Value of Money
Many people can attest to the frustration of paying off credit cards only to see the balances rise again. My own experience shows that prioritizing debt repayment over savings often enriches lenders while losing valuable time. Starting a policy first allows you to grow savings and pay down debt, with funds continuing to grow and eventually overcoming debt through compounded growth over a lifetime.
Creating a Financial Tailwind
Nelson Nash’s Analogy
Nelson Nash, in his book Becoming Your Own Banker, compares using an IBC policy to creating a tailwind for your finances. Just as an airplane benefits from flying with a tailwind, your financial journey becomes easier with the right environment. When you take out a policy loan to pay off third-party debt, you might pay an interest rate of 5-6%. However, while you pay this interest, your cash values grow, offsetting the cost.
For instance, I recently had a policy loan with an $11 daily interest cost, while my cash values grew by $19 per day. This meant I was effectively paying off debt while gaining $8 per day—creating a financial tailwind.
Considering Potential Pitfalls
Discipline and Responsibility
While I believe everyone should become their own banker, it’s crucial to recognize potential pitfalls, primarily related to discipline. Nelson Nash often discusses the human condition in his book, emphasizing that the policy owner’s behavior significantly impacts their banking system’s success.
A lack of discipline could lead to using the policy like a line of credit, accumulating more debt, and potentially causing the policy to lapse. My advice? Be an honest banker, exercise discipline, and pay off debts in a wealth-building manner.
Built-in Incentives for Discipline
The IBC inherently encourages self-discipline. The obligation to pay premiums can be viewed as an exciting opportunity to increase wealth. When you have a policy loan, the incentive to repay it quickly is strong, knowing you can access that money again.
Conclusion
Using the Infinite Banking Concept to pay off debt is the most efficient and beneficial approach for long-term financial health. By becoming your own responsible banker, debts will be paid, capital will grow, and new opportunities will arise to build a secure financial future.
Ready to get started? Connect with us here, and we’ll help you determine whether IBC is right for you!
