Before you scream I’M DEBT FREE…
Before you pay off your debts, consider first capturing your money in a place (a “Warehouse of Wealth” if you will) that will compound over your lifetime, giving you more control as well as safety and security.
We call this the “Roll Over Roll Down Method” of paying off debt.
The Key is understanding opportunity cost. Opportunity cost can be understood by asking yourself “what else can I better do with this money that would put me further along on my financial path?” Maybe paying off debt is, but then again, maybe it isn’t.
After reading the book “Building Your Warehouse of Wealth” by R. Nelson Nash, we began to understand that uninterrupted compound interest takes time to really gain traction. Starting as soon as possible will give your money the ability to grow and create a financial tailwind over your entire life.
There are many methods of paying off or paying down debts. They all work, but some work better than others. This is especially true if you take a long term approach to wealth building, up to and including multiple generations.
Our “Warehouse of Wealth” begins with a Specially Designed Life Insurance Contact that maximizes the cash value and minimizes the death benefit qualities of the policy.
To start your debt roll over roll down method, one would want to decide the monthly amount of extra money they have to put towards paying off debts. Then they would first set up this life insurance policy and, as your cash value builds up, you take a collateralized loan against your cash value and send that money off to your debt. This is the Roll Over part of the concept.
As you are able to pay off more debts, you will have more money available to put towards your policy premium which further speeds up your cash value building and the long term compounding of your money.
“But am I not trading one debt for another?” Yes and No. While yes you are trading one debt for another, the loan from the life insurance company is 100% in your control. The loan is “non structured,” meaning there is no set payback schedule or amount. Secondly, even though you have an outstanding loan, the specially designed life insurance contract means that your money continues to compound at a tax deferred rate. Even if the interest rates are exactly the same you will come out ahead because each dollar is compounding, and as you are paying off your debt you are using amortized money. This means, each month, each year the amount of debt becomes less all the while the amount of interest you are earning becomes more.
When using the roll over roll down method you will delay paying on the life insurance company loans until you have all of the outside debts paid off. Now with all your monthly cash flow, you can choose your payback terms for your policy loan.
Policies we utilize for this are from Participating Insurance companies. Participating means that all policy owners participate in the profits of the company. These profits come as a yearly dividend to you. Once a dividend is credited it cannot be taken away. The Financial Tailwind is that your money increases each year no matter what.
The idea is to think long term. Think of each of those dollars that is paid directly to your debtors as gone forever! But if you first put those dollars into your warehouse of wealth, they will continue to work for you for the rest of your life. As you pay back the loans to the insurance companies those dollars are available to be used again and again and again. This approach to wealth building is also discussed in the book Becoming Your Own Banker, available through our website.
Let us show you what we mean.
Say you have a student loan of $20,000 that you want to pay off. The length of the loan is 20 years at 7% interest. Your payment would be $155.06/month. Your total payments over 240 months would equal $37,214.35 with your interest cost of $17,214.35. This seems like a large amount of interest and it is. But what if you had $20,000 in a savings account that is earning just 5% interest?
By keeping your money in savings and allowing it to continue to grow uninterrupted, you would have $53,065.95. You would have earned $33,065.95 in interest over that period of time. With this scenario, you would come out ahead by $15,861.60, all by keeping your money in a savings vehicle first, over paying those monies directly against your debt.
A Better idea-roll the debt into your control
The idea is that you want to put your money in a place that earns uninterrupted compound interest. What if there was a place where your dollars do more than one job? Each dollar doing multiple jobs increases efficiency over time!
Build it up, roll it over
The Infinite Banking Concept (IBC) involves creating a storage system for your money that is guaranteed to grow and gets better every single year. It does this through design. While you can practice IBC with a shoe box (the idea of borrowing money and paying it back with interest, also known as Economic Value Added (EVA)), we have found that setting up a Specially Designed Life Insurance Contract as a savings vehicle is currently the best system. This beats out using other forms of credit like Bank Loans, HELOC’s, 401k loans, and personal loans.
Specially Designed Life Insurance Contract (SDLIC) has been around for over 150 years. It predates the tax code and has been a safe place that people used prior to the advent of the qualified plans and easy stock market entry for the average person.
What this does is creates a financial tailwind with your debt paydown. Each dollar is growing tax deferred, even if you have borrowed against it. As you build up your cash inside the SDLIC you then use the collateralized loan feature to pay down the debt that is outside your control. By moving the debt to your control you have many options.
- You can defer the payments as long as you wish
- You can pay just the interest each year. (Interest in this account is simple interest calculated yearly on the outstanding borrowed amount)
- You can set up a payment plan of your choosing for as short or as long as you wish.
The idea is to concentrate on getting 100% of your outstanding loan balance rolled to your SDLIC and into your control. Then you can concentrate on paying down that loan. We recommend charging yourself at least the interest that you would have paid to the outside creditor. Each payment you make to your policy loan is available to be used again and again. This allows you to recycle your money over and over.
Isn’t the debt snowball the best method to pay off debt? No, because you are giving up control of your money and your money does not earn uninterrupted compound interest! Secondly, you lose protection. By using SDLIC you get access and control of your money plus protection in case something would happen to you. What if you just pay off your debt directly to the debtor, then you get hit by a bus? At least you were debt free right? But that money is gone forever. What if, in this same scenario, with the same dollars, you pay off your debt, and your loved ones receive several hundred thousand tax free dollars regardless of whether your debt is paid or not. Now that’s control!
Another idea is, what if you concentrated on paying off your loans and still owe money but lose your job? This happened to many people during the great recession in which case they had to default on loans because they didn’t have the cash reserves to weather the storm. Again, if your debt is rolled over to your control and you lose your job, you can decide to reduce your payback or stop paying all together until your job situation is fixed. Maximum control and Maximum efficiency.
Use our contact form to schedule a 30 minute strategy session to learn how the Infinite Banking Strategy and the Roll Over Roll Down Debt system can work for you to give you and your family Financial Peace of Mind, Financial Protection and create a Financial Tailwind. https://dynastywealthpartners.com/contact/