How The Infinite Banking Concept Fits Into Your Financial Strategy

The Infinite Banking Concept isn’t an or strategy, its an and strategy. When you think of a financial strategy, you think of ways to use your money to maximize its effect. The conventional way of thinking is minimize debt, live below your means, put away some money for a rainy day, and invest for your future.

This is not bad advice, in fact the habits it instills are very, very good. Its flaw is that this is an or strategy. You can invest for your future or make an extra mortgage payment. You can do a home upgrade or increase your rainy-day fund.

By definition, your budget is in conflict with itself. Your expenses will always be at war with your savings and investments because your budget is not synchronized. This is because conventional financial advice never considers the fact that the function of banking can be controlled. It revolves around spending money not building assets.

What this leads to is a thinking that each individual dollar needs to have a purpose. That is what a budget does, it shows you how you are spending or saving every dollar you make. It shows you each dollar’s purpose, not utility.

Utility in a budget is getting more than one function out of your money. You first need to understand the true purpose of a line item in your budget. For example, short term savings must be easily accessible. Retirement investments must maximize growth, be tax efficient, and be capable of providing income during passive income time. Notice how purpose has nothing to do with where that money is stored. Short term savings could be in a bank account or under a mattress, where it is stored is irrelevant as long as it meets our needs. The only thing that truly matters is that it is easily accessible.

With that mindset, we can start to redirect some of these items to an area where we have more control, and in turn, more utility.

Here is a conventional example; using the Home Buyers Plan to withdraw money from your RRSP to fund a down payment on a home. This is an example of somewhere money has utility, but the environment where the money is located is extremely restrictive. We are getting closer, but there is still a lot wrong with this example.

First, you are withdrawing funds from your RRSP. This means you stop its compounding and its growth. Second, an RRSP is a vehicle that severely restricts your control over that money in the long run. It is designed to sound appealing in the short term because you transfer the tax risk until later in life. In doing so, you are shown a misleading balance (you do not own the entirety of that money, you just don’t see the tax cut the government takes yet), you must draw down the amount later in life (again, interrupting compounding), you have no control over whether you draw down that money or not (you must convert it into a RRIF and start drawing funds no later than the end of age 71 so the government can take their cut).

With true utility in a budget, there are no constraints or limitations on how the money in your budget is used. You create an and in your budget vocabulary versus an or. To do this, we need to focus on the function of banking.

Banking deals with assets and liabilities, not dollars. In fact, a bank’s balance sheet is the exact opposite of your own. An account balance is a liability for bank, but an asset for you. Just like how a mortgage is a liability for you, but an asset for a bank.

Bank’s think this way because true wealth is measured in assets and liabilities not cash flow. Your net worth is not based on how much money you earn per year, it’s based on your assets and liabilities. Cash can of course be an asset for you, but it does nothing sitting in an account expect make the banking industry run.

Banking works by taking in deposits, and then lending out those deposits to other people and charging interest for accessing that money. This is important, banks don’t lend out their own money. They lend out depositors’ money. What this means is, if you finance something from a bank, for example a car, but simultaneously have your savings sitting in an account with that same bank, you are financing from yourself and paying the bank interest to do so.

The bank has effectively synchronized your own budget, just so that it works against you rather than for you. They have turned your asset (your savings balance) into your own liability (the loan balance). Or from the bank’s perspective, they have taken your savings (the bank’s liability), and loaned it back to you, with interest (the bank’s asset).

This is what leads to the situation where you may save 10% of your after-tax income, but you also pay over 20% of your after-tax income on interest. One step forward, two steps back. If we control the banking function in our lives as it relates to our needs, we turn that financial energy drain into an energy gain.

We start by focusing on building an asset we can use to control the banking function. We capitalize that asset by focusing on getting utility out of our budget.

If we know that this asset is going to compound and grow our money, guaranteed, extremely tax advantaged, while remaining liquid, we can start to lump some of our budget together. Short term savings, long term savings and retirement planning can now all be lumped together, because our asset (a specially designed participating whole life policy) meets all of the requirements for those budget items.

Then, focusing on controlling our cash flow and stopping the leaks, we can start to recapture some of the expenses that are currently financial drains and turn them into financial gains.

Take the car loan for example. When you don’t control the banking function, the bank has complete control over the repayment of that loan and profits off of each payment. If we instead financed that loan using a system we own and control, we benefit from the profits generated.

Now, there is still interest on a policy loan. The difference is as participating policy owners; we participate in the divisible surplus of the company in the form of a dividend. That interest is profit for the life carrier, but we are a co-owner of the life carrier, which means we share in the profit. We can recapture that interest and put it to work for us.

We can then continue along this same line of thinking. Capitalizing our policy with all the money we were previously saving or investing, and leveraging our policy to finance the things we need in life and profiting off the process of banking.

Over time, we recapture more and more of our budget and more and more of our expenses until we have completely taken over the function of banking in our lives. We did this by thinking differently. Prioritize utility, prioritize building assets, and understanding that when you control the banking function in your life, you can turn your liabilities into assets that generate wealth for you and not the bank.