Am I Further Ahead By Taking a Loan?
So here’s a truth that can change the way we look at money and finance forever.
We all need financing. We finance everything we buy. When we borrow we pay interest to someone else. When we pay cash we give up the interest we could have earned otherwise. Pay up or give up!
Better than paying cash we can borrow against an asset that we own and control such as the cash value sitting in a properly structured dividend paying life insurance policy.
One of the biggest misconceptions in everyone’s financial world is that if you pay interest at 5% and earn at 4% that the 5% paid would be a larger number. It’s not.
A $45K loan over 5 years at 5% would cost you $5,815.
Whereas, a $45K investment at 4% would earn you $9,755.
By taking the loan and not interrupting your investment you gained $3,940 over 5 years. (Compounded annually in both cases).
The reason for this over any time period is simple: you pay interest on a declining balance and earn interest on an increasing one! So with that little piece of information, we have to rethink paying cash.”
All this is for us to recognize that our own capital has a cost, as well as that which is borrowed from banks or car loan companies.
This is called Economic Value Added (EVA)
If you borrow money from a bank, when you pay them back, you also have to pay them interest on the money, (even though it’s not their money, but rather their depositor’s money). The same with a credit card, you always have to pay them interest.
But if you use your own money, you never think to pay yourself interest. Why not?
When you stop your money from growing by withdrawing it instead of taking a loan against it, you are declaring that your money isn’t worth as much as other people’s money.
This is the essence of the Infinite Banking Concept - realizing our own money has economic value. This is realized by letting your money continue to grow while you’re borrowing against it.