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How to Beat the Bank by Becoming the Bank


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Banking in some form has been around for thousands of years. It is responsible for untold wealth for lenders -- and the model can be replicated by average families to create and preserve wealth.

We've only been trained to be the borrower. We know about credit scores, debt to income ratios, payments and interest rates. Almost none of us have been taught how to be the lender and make all the money because banks don't want us to know the secrets that have sustained them for generations.

Interest Volume and Velocity

Banks care much more about interest volume on loans instead of loan rates. Interest volume is the amount of any payment that goes to the bank in interest (profit) and how much goes to the borrower in the form of loan pay-down. If you take out a 30-year mortgage at a 4 percent, and your principal and interest payment is $1,000, about $900 will go toward interest in those early years and only $100 toward the pay-down. Banks do not see that loan as a 4 percent loan but rather a 90 percent interest volume loan. This is why they love to refinance older loans. The rate may be less, but the total of your payments will increase dramatically. You might have gotten your mortgage down to 60 percent interest volume, but rates are down, and you are supposed to refinance to save money -- correct? Rethink that broke personal finance business model, because you are making the banks richer at your family's expense.

Take 20 minutes and add up all the payments you have paid on everything you have ever owned.

The next way banks make money is interest velocity. This refers to how many times they can take deposits and loan them out or turn over the money, thus creating another payment stream back to the bank. When this process is repeated in a massive way, it is a solid, predictable way to create wealth regardless of stock market performance.

Take 20 minutes and add up all the payments you have paid on everything you have ever owned. This is all the money that has left your life and entered the banks' life as payments. Now add up all the liquid money you have in your individual retirement account or 401(k). Which number is bigger? Most of the time, it is the banks by a whole bunch.

You can stop that madness by taking some of your own capital (all at once or built up over time) and make your own loans to yourself and create payments back to yourself. Maybe you could finance your own car and make money on the car instead of getting killed in depreciation and interest. This is fifth-grade math but flies in the face of conventional wisdom. You also might start making safe loans with great collateral to other people and businesses.

The Secret's Inside Your Life Insurance

Once you decide you need to be the bank, where do you pool your funds for maximum results? The answer is inside of a correctly designed high-cash-value whole life insurance policy. When you fund one of these policies, you get many benefits, and one of the biggest is the ability for your money to grow tax-free even when you borrow the money out of your policy. When you pay your policy loans back, you free up that cash to be used again (velocitize) and maintain a pool of money that should always be used as your family bank.

To set up your family bank inside of a whole life policy, you need a policy that will give you high cash value and lock in your premium for the life of the policy. Make sure the carrier has a good "paid up additions rider" that allows for high cash value and small amounts of permanent insurance to be bought with your paid dividends. Make sure the carrier will credit you your growth and dividends on the money you borrow out. For example, you fund a policy with $50,000 and borrow out $40,000 right away from the cash value. I know of carriers who are paying out 6.4 percent dividend if you don't borrow out your money. If you borrow out the money, they will reduce the payout to 4.4 percent.

This same carrier will charge you 5 percent simple interest on the money you borrow. You pay out 5 percent simple interest and get credited 4.4 percent compounded annually, giving you a cost of funds of 0.6 percent. Where else can you borrow money with zero credit check or qualifications for 0.6 percent simple interest? The only downside is the cost of insurance, which can be overcome in the first few years with strong funding of the policy. What will happen in the near future with strong funding is the insurance carrier will owe you more in dividends than you owe them for your minimum premium. That point this occurs is called self-completing. I believe all the benefits mentioned far outweigh an insurance premium.

Where Do the Banks Stash Their Assets?

Your family bank will allow you to recapture depreciation on big-ticket items like cars. This structure will allow you to borrow money quickly regardless of credit, income or job status. Imagine you recapturing all the payments you are now giving to a bank systematically making them rich and redirecting those payments back to an insurance policy that grows tax free and guaranteed. This is a powerful rethink on the traditional financial model.

Before you buy into the myth that whole life insurance is a lousy place to put money, ask yourself why banks have tens of billions of dollars of their tier one core assets in these types of contracts. Also, why do major corporations have boat loads of their money in these same structures? This is on top of the famous family dynasties that have been using these types of policies for generations to grow and protect wealth. If it were such a lousy place for money to be placed, why do institutions with all the wealth use them extensively? The simple fact is that when these are constructed properly, they are great places to grow and protect wealth. They also provide easy access to most of the funds to start your own bank and put volume and velocity on your side instead of the banks.

John Jamieson is the best-selling author of "The Perpetual Wealth System." Follow him on Facebook and Twitter.


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