Infinite Banking, Klarna and Dave Ramsey
Okay, maybe I’m behind the times. I don’t use DoorDash and I certainly don’t use Klarna to finance DoorDash orders. But that is exactly what is happening today.
“What’s the difference between Klarna and credit cards?” Fair enough question. But before I answer this question, I should remind you all that I am old enough to remember when it wasn’t possible to pay for groceries or food items with a credit card unless you were at some high end restaurant which honored the prestigious Diner’s Club Card. Even gas stations (we called them service stations back then) only allowed credit to be extended when a consumer was using a credit card issued by the company itself, like Shell or Chevron. But Klarna takes extending credit to an entirely different level.
1. It has extremely high interest rates
2. It employs stiff late payment fees and penalties
3. It has no application process, which makes it extra easy for people to use, and
4. It aggressively pursues unpaid debts
Dave Ramsey wisely teaches folks to stay away from Klarna, and any other buy now, pay later schemes like it that are out there. His reasoning for justifying his position is, “You could’ve just budgeted, saved up and paid for it all at once.”
I find Ramsey’s reasoning interesting as this is exactly what Infinite Banking is all about. Saving up and paying cash for something all at once instead of transferring wealth to the upper class. Yet Dave Ramsey abhors Infinite Banking. He has solid reasoning about budgeting in general but his abhorrence of Infinite Banking maligns his own budgeting ideologies. Here is why.
Dave advises saving up money and paying cash is the best way to make purchases. This is what Ramsey’s advice looks like for a $5,000 purchase.
· Save $38 per month
· Over 10 years
· Earning 1.834% and
· There will be $5,000 in savings which can be used to pay cash for something
The $5,000, when spent, will never earn interest again because it has been spent. After 10 years, $997 of interest will be lost which could have been gained on the $5,000 spent. After 20 years, $1,792 of interest will be lost which could have been gained on the $5,000 spent.
Because of this, saving up has to start all over again to stop this perpetual loss of interest. At $38 per month, and 1.834% annual compounding interest, it will take another 10 years to accumulate $5,000 and stop the loss of interest.
The Infinite Banking process provides a better way to finance things.
1. Pay premiums to a participating whole life insurance policy which is designed to produce high guaranteed cash values
2. When the cash values reach the point where they can be leveraged, borrow (in this case) $5,000 against the policy
3. Repay the policy loan (in this example) $38 per month ($456 per year) and
4. Cash Values compound and grow from $5,351 to $14,431 over 10 years, cash value increase of $9,080
Accordingly, instead of having just $5,000 as when paying cash and then saving up $38 a month for another 10 years to make a similar purchase, there is 81.60% more money after 10 years, $9,080! And just 5 years into this Infinite Banking process there is an additional $4,054 of cash value growth which can be leveraged and used the same way the first $5,000 was leveraged and used. This can be done without affecting the continued compounding growth of the cash value.
This process of leveraging money is used by all successful banks to make money for themselves. Obviously, banks don’t’ use participating whole life insurance to leverage and lend because they have their depositor’s money to lend instead. Infinite Banking uses participating whole life insurance as a place to store money so when it is needed by the policy owner, the Insurance Company itself becomes the policy owner’s depositor, lending their money to the policyholder and allowing the cash value to continue earning compounding growth. This increases the cash value of in the policy via uninterrupted compounding growth while it is being leveraged to make a purchase. This further benefits the owner of the policy not a bank, not Klarna, not a credit card or some other financial institution.
Budgeting to make a purchase with Infinite Banking makes more fiscal sense than budgeting to save up to make a purchase. The reason why is because participating whole life insurance continues to experience compound growth even when there is an outstanding loan against it.
This doesn’t happen with typical savings. Use savings to make a purchase and the compounding growth is lost forever on that particular amount of money. Savings must start all over again before any compounding growth occurs but the lost interest on money spent from savings is lost forever.
The crux of the matter is time. Americans tend to want everything now. Not tomorrow and certainly not next month or next year. Everyone has 24 hours in a day and 365 days in a year. But Americans don’t like to wait for anything. This lack of patience has cost the lower and middle income classes tremendously.
According to Pew Research the middle income class is shrinking rapidly in America.
This primarily has to do with the fact the middle income class Americans carry a large amount of debt which causes them to transfer their money to the upper income classes. From automobiles to student loans, and from credit cards to mortgages, middle income class Americans have impoverished themselves buying liabilities with cash or via borrowing money from others.
Upper income class Americans purchase automobiles, education, mortgages and even educational expenses with the income produced by their assets which they have purchased.
Infinite Banking is a process. When purchasing participating whole life insurance, which in and of itself is an asset, it allows the policy owner to recover the cost of the liabilities they do finance like automobiles, educational costs, mortgages and even investments, similar to how the upper income classes finance these same purchases.
Debt can be turned into an asset like all banks do to make a profit. But it takes time. It takes time to save up money to finance a purchase like Dave Ramsey advises. Likewise it takes time to build up enough cash value to finance a purchase. As can be seen in this simple illustration of the Infinite Banking process your wealth doesn’t have to be transferred when you make a purchase. It can continue to compound and grow perpetually. Doing so stops the transfer of wealth and it also stop the loss of interest which could have been compounding on the money spent.
All Infinite Banking takes is time and self-discipline. And there is no better time than now to begin.