But here on Earth and in the US, we have to pay taxes.
Taxes were included in all of my calculations except when investing solely in real estate since it's impossible to assign a universal tax rate to RE. However, the vast majority of people pay little or no taxes on real estate thanks to a plethora of deductions. Personally I have never had to pay taxes on any of my RE holdings.
Yes, I have already conceded that in the scenario you describe, you do eventually catch up. However that is assuming "Investor B' makes 3 consecutive investing mistakes and invests in a strategy that is taxed at a ridiculously high tax rate, and doesn't do anything fancy with his money, and settles for a very low 10% rate of return in the hard money world. If he is a smart investor, then he still easily beats your rate of return as I have already shown with a simple margin loan that takes 2 seconds to set up and anyone is able to understand.
You: (.4* 90k) + (.06*100k) = $9,600
Me: (.08*150k)-(.02 *50k) = $11,000
@Aaron Porter Being able to lock in insurance rates when you are young certainly has merits, and if we want to discuss the merits of having insurance, or which policy (term/whole/whatever) is best under a particular set of circumstances, then that is a separate conversation and one that might make sense for some people depending on their situation. My issue with IB is people continually claiming that it out earns other investing methods which it clearly does not. For any IB strategy someone wants to devise, I can devise a plan to outperform it, and I can guarantee that my plan is simpler to set up and understand.
For a while I had a term life policy because it was dirt cheap. I used that policy for a few years until my net worth grew large enough that if I were to die today, my family would already be set for life. After that point I would rather not have life insurance at all and not pay any premiums, and instead keep investing that money and letting it continue to grow so that I can also enjoy it while i'm still alive. A million dollar life insurance policy is pretty amazing if your family is broke, but as investors it's likely that most of us will already leave a significant nest egg behind when we pass, greatly reducing a reliance on an insurance policy.
There is nothing wrong with insurance, but people need to stop implying that an overly complicated IB strategy will out earn other investment methods.
1. I didn't miss a key point here, I am fully aware that you are borrowing from the insurance company which is why there was two separate calculations when computing the returns and why the full amount of the hypothetical 100k initial investment is still growing at 6% annually. QUOTE: (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return). Please ensure that my math is actually wrong before jumping in to correct me that I 'missed' something.
2. It 1000% absolutely matters what the spread is. If you're borrowing at 8% and earning 6%, then you are losing money every time you take a policy loan. In this situation it would simply be more beneficial to have never put the money into the insurance policy in the first place. It only makes fiscal sense if you can borrow at a lower rate than your guaranteed earning and thus earn an arbitrage spread. It would be silly to put money into an insurance policy, just to take out a loan and lose money in the process so you can go invest, when you could just skip the insurance policy altogether and just skip straight to investing and not lose any money to loan interest fees.
3. Why are you bringing up savings account dollars? Who puts money into a savings account earning .01% interest?
4a. I didn't bash the 90% borrowing capability of the insurance loan and then praise the 50% borrowing capability of a margin loan, I don't care what the loan limit is, or what the overall strategy is, I only care about whether or not the method used actually makes money. Comparing the financial outcome of the 90% loan vs the 50% margin loan, the margin loan earned significantly more total money which is why I prefer that method and praised it.
4b. Risk profiles aren't all that different. While the cash value is guaranteed to grow, the 90% of value that you took as a loan no longer has a guarantee associated with it essentially putting 90% of your net worth at risk. If you withdraw 90k and put it in the stock market you could theoretically lose all 90k with bad decisions leaving you with a 100k policy and a 90k debt which translates into only 10k of net worth. I can theoretically lose 100% of my net worth, and you can lose 90% of your net worth, not exactly a significantly different risk profile.
5. A full paragraph to complain about my choice of verbiage of 'random' fees, but the overall point remains that life insurance has very high fees associated with it. @Thomas Rutkowski lists the fees at 15%. If you are putting 500 into your policy each month, only 425 is cash value, of which you can take a 90% loan of $382 to invest in real estate. I however have a full $500 to invest in real estate. So not only do I have an extra 118 to put towards real estate each month, but you still have to make loan payments each month which further negatively impacts your ability to save towards a down payment.
5b. "After year 3 or so, every $1 in premium paid creates MORE than $1 of new cash value." ... Yes, it's called compound interest and you are gaining 6% annually. This is how you are eventually able to break even after around year 7 when your total cash value finally balances out with the amount you have contributed to the policy. This isn't exactly magic, nor is it unique. You act like you are the only one earning compound interest and everyone else is just putting money in a savings account (which you mention MULTIPLE times in this thread). You deposit 500 which turns into 425 of cash value after fees and earn 6% on 425, while I earn 10% of the full 500. This is how I get a head start with my investing. After 7 years you finally break even with your contributions, meaning you have now contributed roughly 12*7*500 = 42k and your cash value is also roughly 42k after 7 years. But I don't need to break even since I don't pay any fees, all of my money is able to start compound growth from day 1 which is how I have a 7 year head start on my growth versus a non-overfunded account. The more you overfund your account the less of an effective head start I get, but I always get a head start of some amount since I never have fees and you do.
6. Once again, WHY are we bringing up a savings account?
7. "Its just math", I am able to earn compound interest too. Stop running numbers where you earn 6% and I earn 0.01% by keeping the money in a bank. So run the math again with me actually properly investing my money instead of putting it into the bank at 0.01% interest and lets see what "just math" says.
7b. "deposit $50k to get 100k or 150k in new cash value" There is never a point where your money instantly or magically doubles or 3x's itself into new cash value. What happens is you eventually build up to lets say a million dollar cash value, and then deposit an extra 50k, and your balance turns into 1.11m because you earned 6% or 60k interest on the 1m plus your new deposit so your value goes up by 110k. Once again this phenomenon is called compound interest and it is not unique to infinite banking or to insurance policies. I earn compound interest just like you do if you would stop running scenarios where I just put my money in a bank.
Images 1/2: One last time, WHY are you showing two charts showing a growth of a policy versus holding money in a savings account? Nobody has ever advocated putting your money in a savings account and earning sub 1% interest. That's why you keep thinking your method is so great is because you are allowing yourself to earn compound interest while comparing that to a scenario that doesn't earn any interest and just holds money in a bank. No offense but you continually trying to compare IB investing to just putting money in a savings account is laughable.
@Thomas Rutkowski Yes, setting up an incredibly difficult to understand insurance policy and letting it sit for around for a few decades will eventually beat doing absolutely nothing special but investing in hard money loans.
However, there is nothing that specifies that I have to do plain vanilla investing. If you are actively doing something with your money and setting up different insurance policies then it seems perfectly legitimate to compare it to me doing something similar and setting up a margin account as in my previous post which easily outperformed the infinite banking even without any of your fees calculated into the equation with your 9.6% total earnings versus my 11% total earnings. If we add the fees back in the numbers get a lot worse for you.
But since we are on BP, it also a fair comparison to look at actually investing in real estate, and even without taking into account any policy fees I still come out ahead because I can invest 100% of my funds into high yielding real estate where you can only invest 90%.
You: (.15*90k) + (.06*100k) = 19.5k
vs
Me: (.2*100k)=20k.
So both the margin loan, and straight real estate investing both outperform IB even without any fees calculated in. This means it doesn't matter what your Maximum Over-Funding rate is because even with no fees whatsoever the method still isn't as efficient as other investment strategies.
If we are to further this conversation, someone is going to need to show some sort of a realistic example, fees included, where you are actively doing something with your IB funds that outperforms someone else that is actively performing some sort of similarly complex strategy.
Technically that would translate into an 8.7% return, but beyond that your overly simplified calculations leave out numerous very important facts, namely the policy fees and how the loan repayments negatively effect your ability to scale your real estate holdings.
I'm going to rearrange the percentages slightly because I don't know of many people who are wealthy that are going to put their money into active income investments like hard money and get taxed at 40% when a passive stock market only pays 20%, plus stock investing is much more familiar and likely to actually happen for readers of the post as opposed to hard money which is a niche industry. Now you are no longer paying 2% and netting 3%, instead you are now paying 1% of that to the IRS, and netting 4%.
You can generally only borrow up to 90% of the cash value, so you aren't leveraging your entire amount. On a hypothetical 100k investment and 10% annual stock growth your returns are (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return)
If I don't do anything fancy and just straight invest the 100k, I get .08 * 100k = $8,000 after tax
Rates may vary from brokerage accounts, but I was able to get a 50% margin loan from M1 Finance for several years at 2% rate. In that case my numbers now become (.08*150k)-(.02 *50k) = $11,000 easily beating the infinite banking concept.
But these calculations are still very much oversimplified because we STILL haven't factored in one of the most important aspects which is the random fees that you incurred in setting up and maintaining this policy. A sample policy for a 35 male can be found here https://www.investopedia.com/a... In that sample policy after 5 years you have paid in $5890 in premiums, but your cash value is only $3738, so only about 64% of your premium payments are going towards cash value. Because of these fees, it takes several years of you earning interest on the cash value just to break even with the amount you have paid into the policy. The sample policy broke even after 10 years. So a more accurate calculation wouldn't have us both starting with the same 100k, because I should always start with more money than you because you will always need to pay fees. In this thread people have claimed that you can break even after 7 years, but most websites list 10 years as the break even point. Regardless, we'll be nice and assume it only takes 7 years to break even and we'll assume I don't even attempt to leverage my account and just go with vanilla stock investing at 8% after tax
So by the time you have 100k in your policy, I'll have 150k thanks to a 7 year head start on investing because I didn't need to pay those fees. At that rate even if you earn 9.6% per year and I only earn a vanilla 8%, it would take you 36 years to catch up to me. And I'll smoke you if I do any sort of leveraging myself such as that margin loan from M1 Finance because I start with more, and also earn a higher interest % each year.
Now it is true that I only have a full 7 year head start if you don't overfund your account. The more you overfund your account, the less of a head start I get since the overfunding portion of your payment is going straight to cash value and not eaten by fees. I will always get a head start of some sort since no matter how much you overfund, you're still paying those base fees. Even if you overfund by $1m the first month, you will still have to pay fees on month 2, 3, 4 etc, so I still get an advantage it just becomes harder to calculate.
But the numbers become MUCH worse if we factor in an investment like real estate where the total returns are significantly higher than 10% of the stock market because I can utilize my entire account balance where you can only effectively utilize 90% of it. If long term inflation is roughly 3% per year, then a 20% down payment mortgage translates into a 15% ROI just from appreciation alone. With equity paydown and cashflow we'll assume a relatively modest 20% total ROI which puts your final investment numbers at (.15*90k) + (.06*100k) = 19.5k and puts my numbers at (.2*150k) = 30k If I get the 7 year head start. Even if we magically erase 100% of your fees and don't give myself any head start at all I still earn more at (.2*100k)=20k.
Finally, I will be able to scale my real estate holdings faster than you, in part because your monthly cash flow is automatically reduced because you need to make payments on your policy loan each month and because part of your next months policy premium is being eaten by fees instead of increasing cash value making it harder to save for the next down payment. Meanwhile all of my earnings can immediately be redeployed towards the down payment of my next property.
In short, infinite banking is NOT going to amplify the rate at which you build wealth, especially if you plan on investing in real estate.
if you put that same 50k in to an overfunded whole life policy and borrowed the 90% (45k) and put in the same investment you would make appr 5500 annually. the 50k still earns the 6%-4.5% which is a spread of 1-1.5% plus the 10% on the investment of the 45k. This spread grows and increases the amount you would make the longer you have the policy.
Your math is off. 1% arbitrage of 50k is $500. So if you take the 500 and the 4500 you get from stock increases on the 45k loan then you have 5k/yr not 5500, which is the same total profit as simply taking 50k into the market at 10%. You would need a constant 2% arbitrage to get the 5500 you cited which is higher than any arbitrage numbers that you or anyone else has mentioned so far as being possible. The difference is that you still need to worry about repaying the loan each month, and I don't. I can immediately use any cashflow from my investments to buy more investments, while you are stuck trying to repay the loan. So you are repaying the loan as money back into a policy earning 6%, and my funds are going into an investment earning 10%, (although its technically significantly more than 10% since money would actually go to real estate and not the silly stock market).
But even then, that STILL only works if we start our calculations at year 7 after you have already broken even from policy fees and costs. But if we actually start at year 1, then by the time year 7 roles around, I already have a significant head start on you because you are just now breaking even and I have had 7 years of compound growth. You can't just plop down 50k on day 1 of an insurance policy and call it an overfunded policy, it will convert to a MEC and lose al of its tax benefits.
If you are breaking even at year 7, then I already have 50% more available capital than you do per my previous post. Even if you were able to arbitrage at a significant 2-4% rate (not possible), you would still never catch up to me if I have a 50% head start and your future investments are being constantly delayed due to these loan repayments.
Its just another tool that works for some and not for others. My only regret is I didn't get a policy sooner.
That's what Bankrate.com is currently quoting for Third Federal Savings and Loan, I'm assuming its accurate.
You can think about adjustable rate loans instead of fixed. I've seen recent 3/1 ARMS at 4.75% which shaves about $300 per month off your payment and would put you back into the positive cashflow.
While adjustable rates come with their own risks, I doubt there are many people that think rates will still be this high 3 years from now. The notion that 6-8% mortgage loans is 'historically average' ended decades ago when the US debt began to skyrocket. A mere 1% interest rate change on 31 trillion dollar debt is 310 billion annually. The US is already a top 10 most indebted country and the government will bankrupt itself if it is forced to pay higher interest rates for a prolonged period.
Prior to this year, interest rates had been steadily declining since the 1980s financial crash, this is not a coincidence since that is the same timeframe that our national debt levels began to spike.
US debt to GDP: https://fred.stlouisfed.org/se...
30yr mortgage rates: https://fred.stlouisfed.org/se...
If you are applying for a new card based on a large purchase, the biggest financial impact is going to be how big the signup bonus is, and not necessarily how effectively you will earn points for this particular trip. It takes a whopping 40k in spend @2% cashback to earn 200 bucks, but its super easy to get a 200 signup bonus.
Otherwise getting a card designed for travel (or cruises in particular) doesn't really help much if you don't plan on regularly traveling. Instead it's probably better to get a card that you can use for everyday spend. If you have the Amex Blue Everyday that gets you 3x at gas and grocery which is pretty good. If you wanted to stay in the AMEX ecosystem and don't spend enough regularly to make cards with annual fees worth it then you are probably limited to the Amex Magnet card with its 200 bonus and flat 1.5% on everything (blue card is 1% on non-category spend so magnate is slightly better).
If you're not tied to Amex, and want to maximize individual categories then something like the Altitude Go card from USBank is decent with 200 bonus, and 4x points at restaurants and a $15 annual streaming credit.
Chase Freedom Flex is 200 bonus and a rotating 5x category that changes every 3 months (capped at 1500 spend per quarter), and a 5x on travel stuff purchased through the chase travel portal. For the first year you also get 5x on groceries. Chase points have a high number of affiliate partners to transfer points and get some pretty good value from each point. You do have to manually activate the quarterly bonus stuff which is kind of annoying.
If you currently rent an apartment, the Bilt credit card is pretty amazing since you earn 1x point by paying rent (can almost always be used since Bilt can even mail your landlord a check if need be). There is no signup bonus but points can rack up quick since no other card will earn you points for rent. You do have to make 5 normal transactions per month in order to get the rent bonus, but the card has 2x points on travel, 3x on dining, and 1x on everything else. Points are best used as a 1:1 redemption for travel partners , 1.25 cents each if you use their travel portal, or 1.5 cents per point if you save your points and eventually use them towards the down payment of owning a home.
So the "actual numbers" involve earning 1% of the cash value after arbitrage? That's not even going to cover the random fees and expenses involved with setting up and maintaining a life insurance policy. There is no reason to introduce countless extra steps when the gain isn't even going to cover the costs.
Not to mention you typically can't borrow the full cash value of the policy, which means you have less money to actually invest into real estate than if you had not paid into the cash value at all. Whole life insurance is complicated to understand, has a very high monthly premium that can be problematic during financial down turns, and yields low rates of return when not using a loan. Many people probably wouldn't otherwise obtain life insurance at all so they are otherwise paying for something they didn't really want in the first place, and could have simply invested the premiums instead into appreciating assets and enjoyed those assets while alive as well as passing them on to heirs should they pass. Lastly a loan needs to be repaid, which is going to cut into monthly cashflow.
In short its just way too much work and effort for essentially no rewards after you account for policy fees and costs. If you really want life insurance then just get a regular policy and skip all the nonsense. There are plenty of other good ways to obtain a loan against assets you own without going down this rabbit hole.
Cashflow numbers will be highly dependent on the geographic location.
There are cities you can throw a dart at a map and hit a cash flowing property, and other cities where positive cash flow of any kind can be challenging during year 1.
Personally I prioritize buying homes in areas that are reasonably expected to outperform the overall market in terms of price appreciation. Using this strategy you will certainly cashflow less during year 1, but fast forward to year 10 and you will almost certainly significantly outperform the average in terms of both current cashflow, as well as total cashflow generated during those 10 years due to regular rent raises.
Cashflow is required to pay the bills, but appreciation is the primary driver in building wealth. And when there is significant price appreciation, there is almost always a corresponding significant increase in rent rates which leads to large cashflow.