I was once told that our need for capital would always be greater than our need for income. Unless you are the ultra wealthy, this is absolutely true. For example, lets say you want a $40,000 car and your income is $50,000 a year, you wouldn't be able to buy that car without the help of outside funding and an extended time frame to pay it off.
Your need for capital is greater than your income. The same is true for nearly every American when it comes to buying a home. You want want a $400,000 home but you your income is only $90,000. Your need for capital exceeds your income.
But what if you could over time create a reserve system you controlled that gave you more capital than you needed and you could use that capital to increase your wealth?
This is yet another reason why I am a big fan of cash value life insurance. You can create a tax-free pool of money that increases every single year and carries no market risk. You can then use that pool of money to recover the money you typically lose on major purchases like cars, business equipment, etc.
However, you can also use these pools of money strategically to increase your cash flow or wealth. One of my favorite clients did just that and provided me with the data to be able to share with my readers.
This did NOT happen over night. This client has been saving money for over a decade inside of his cash value life insurance. He and I have reviewed on several occasions how to use this plan as a weapon of mass production for his wealth.
Recently a real estate lending opportunity was presented to him and his wife. He knew the realtor looking for a hard money loan well and was familiar with the area of town the property resided in. With his money backed by a promissory note and recorded on title with the state as collateral, the client borrowed from his life insurance cash value to increase his cash flow and wealth.
It's like creating your own line of credit where no one can tell you how to use your own money.
Reminder, with a properly built life insurance plan you can borrow against your plans cash account and use that money elsewhere. I call this earning interest in two places at once. Some call this arbitrage or marginal spread. I call it smart! His plan will continue to earn around 5% compound interest while the money is borrowed out. The client will pay it back on his own terms as well as with an interest rate around 5%. But the pay back is using simple interest.
The hard money loan he secured is for 12% annual interest. This means on the $150,000 he lent the realtor, he will earn $1500 a month or $18,000 for the years. He's able to earn 12% in the real world with money that would grow inside his plan whether it was in or out of the plan. Pretty brilliant, right?
It actually gets more brilliant! You see since his money is in his plan still earning 5% interest, he is actually using the life insurance company's money instead of his own. His money is used as collateral for the loan. Yes there is a 5% charge for using the money but he knows he will return the principle to them fully in the future. Therefore his only true cost on this deal is $7500 in interest for the year or $625 a month. Plus, he gets to write this interest off on his taxes.
Wouldn't it be nice to increase your wealth and cash flow while also picking up another tax write off?
This is how banks operate. They use other people's money so their only skin in the game is the interest paid. While most people think of this deal as 12% subtract the 5% for a real interest rate of 7%, banks know they are actually increasing their money by $10500 after they subtract the cost of the interest from the $18,000 increase.
Banks never confuse numbers with money. You have to look at what your real costs and real increases are to determine your interest rate and profitability. Banks are expert level at this while most Americans are at beginner level.
$10,500 divided into $7500 is a 140% increase on your money. Yes it is a smaller amount but your $150,000 is increasing by 5% internally and you just made an extra $10,500 for the year by understanding how to leverage marginal spread to your advantage. You've now behaved like a bank and will be rewarded handsomely. Don't confuse numbers with real money increases.
There is a reason banks own the biggest, most beautiful buildings in every city. It's because on average they are making triple and quadruple digit returns on their money while using other peoples money at a very cheap price.
Be smart like a bank and you will earn bigger returns like a bank. It's all in understanding how to really use and calculate interest. Banks do NOT want you to know this. They want you to continue to hold deposits with them for pennies on the dollars while they turn around and make millions of dollars in profits.
So you can look at it as a 12% gain on your full amount of money or a 140% gain on your actual cost of using someone else's money. Either way, it is much higher earning rates than you can normally get and that is how you increase your wealth over time.