Oftentimes people say to us, “Why would I pay interest to an insurance company when I can just pay cash?” Here’s the secret. Every purchase you make, whether you finance or pay cash, is financed. You’re either paying interest to a bank or credit card or losing interest by draining your tank.
Nelson Nash shared with me his four cardinal rules of finance and rule number one was think long term. And as I’ve had a chance to reflect on that, I’ve come to understand and appreciate
exactly what he meant.
Think long term? He was referring to compound interest and more importantly, uninterrupted compound interest. So the key is how can we have uninterrupted compound interest and still take care of all of the things in life that come up; paying for weddings, buying cars, medical emergencies, etc. And how do we continue to earn interest on our money and still take care of all of these issues?
Let’s take a look at what compound interest is. Basically, compound interest is when your interest earns interest. Albert Einstein once called compound interest the eighth wonder of the world. It’s very simple. There are only two factors that affect compound interest: time and money. And we can never get time back. That’s why it’s so important to start now and never drain the tank. Never pay cash for major capital purchases because you’ll never see the interest you don’t earn on that money. If we’re growing our savings but then we have to drain down our savings in order to make a purchase or to pay for an emergency, we’ve just violated thinking long term and we interrupted compounding of interest.
This is where borrowing money from an insurance company could actually help you make your money more efficient. How? Because we’re getting a collateralized loan, and that basically means our money never leaves our policy. Our money continues to earn uninterrupted compounding of interest, and we have a separate loan from the insurance company that we pay down. As we pay down that loan, our equity in the policy increases and that’s the secret to using other people’s money and taking advantage of uninterrupted compounding of interest. That leads us to our next point.
What is the difference between compound interest and amortized interest, and why would it make sense to leverage other people’s money at a cost when you have the cash available? Why not just take your cash and make that major capital purchase? Quite simply, compound interest grows on an increasing balance and amortized interest is charged against a declining balance. That’s why you actually earn more interest on a lower interest rate when it’s compounding, then you’ll pay on a higher interest rate for an amortized loan.
If you look at any loan, for example, a mortgage, you’ll see that in those beginning years, a ton of your payment percentage is going towards interest. But as that loan matures, more and more is going towards breaking down that principal balance on your loan. This is why you could earn more interest at 3% over a period of time compounding than you’ll pay amortized over that same period of time at 5% interest being charged. It’s a crazy phenomenon that a lot of people don’t understand. That’s why they’re giving up control of their money to pay cash for major purchases.
I’ll never forget about 25 years ago. I was speaking with the president of a bank and I explained this concept to him, the difference between compounded interest and amortized interest. He says, “Yeah, yeah, yeah, I understand.”, but he didn’t fully understand this whole concept. The difference between compound interest and amortized interest is the basis of the banking industry, yet this CEO of the Bank had no clue.
If you realize the power of compound interest, you would never drain the tank. You would want to maintain as much control over as much money as possible for as long as possible. That’s the key. That’s why you should always borrow against your insurance policy, gladly pay the interest to the insurance company because your money is continuing to earn uninterrupted compound interest for the duration of your ownership of that policy.
If you’d like to get started with the whole life insurance policy designed for cash accumulation,
so you could earn uninterrupted compound interest on your money, or so you never have to drain the tank again, be sure to visit our website at Tier1Capital.com to schedule your free strategy session today. Also, if you’d like to learn exactly how we put this process to use for our clients, check out our free webinar, The Four Steps to Financial Freedom, where we do a deep
dive on exactly how we put this to work.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.