- You want to sock something away in savings every month.
- You’d like to have some life insurance to cover the unexpected.
- You need a car to get around, so you’ll probably be making car payments.
Let’s say you’ve been doing pretty well with savings. You’ve got a $25,000 emergency fund accumulated in a savings account. Way to go!
So financial life looks a little something like this:
In terms of many people’s expectations for wealth-building, this looks like a win. And in many ways it is. Having $25,000 saved up is a great step. Keeping that momentum going with $500 a month in savings is great! But then there is the other side of the ledger. A $70 insurance payment and $400 a month for a car the family really needs. Poof. As soon as that money’s saved, it’s gone.
How much of this money is actually building wealth for you? The $500 a month in savings is building wealth and earning interest, but the interest rate is tiny, and that money is taxable. Yet this is the path that many people take.
There is a different path you could explore. What if that $500 a month could earn interest, and you could still buy your car, and have the death benefit you want? Instead of $500 going in and $470 flying out of your hands, you would have $500 a month of cash flow. Annually, that’s $6,000.
Think about that from age 30-60. 30 years times $6,000 is $180,000 of cash-flow. What if that earned a modest interest rate of, say 4%? at a simple compounding interest rate and assuming this 4% didn’t have a tax liability charged annually, that adds up to $336,509.60.
But wait, there’s more! You still have that $25,000 emergency fund that you started this exercise with. Add that in at the start, and you get $414,475.90. Think about that for a second. That monthly give and take – money in/money out in your cash flow could translate into $414,475.90 by the time you are 60. This is not just money you are socking away and forgetting about. You are using this money for (in this scenario) three things: savings, death benefit and a decent car. If that were true, is that something that you would want to understand and incorporate into your financial plan?
We call this Uncommon Banking.
Here’s how it works. We’ll use the same money you started with in the all too typical savings scenario we described above. To begin with, take the money you were putting into savings, along with the term life policy premium and put that into a whole life insurance premium. Then you can do something called overfunding on that whole life policy. Over the next 4 years, take $5,000 from the emergency fund to overfund your insurance policy. You still need a car, so go ahead and purchase a car every 5 years. You borrow that against the cash value of your insurance policy, and in effect, you are paying yourself back $400 a month instead of paying the bank.
Here’s the beauty of Uncommon Banking: Instead of saving one place and tossing money at insurance in another place and money for a car payment in another, you are putting three cash-flows in one place that produces compounding, tax-deferred, liquid cash.
The results are staggering. You get your life insurance, with an increased benefit compared with a 30-year term policy. You get the cars you need. And you have a pile of liquid, tax-free cash that you can access via policy loans and not pay tax on that.
So that $400K+ is not just a pot at the end of the rainbow. That money has been working for you this whole time. It’s been accumulating via compound interest, and you’ve been using it to buy those cars and you can use it to borrow so you can purchase anything you like. It is WAY more than a death benefit.
If you desire control, liquidity and predictability of your money; if you want no negative compounding, no negative returns, no taxes due, no complicated 1099’s from brokerage firms which increase the cost of your tax returns, then please click here for an even more in-depth explanation of Uncommon Banking.