The Infinite Banking Concept
Velocity of money can be described as the rate at which money changes hands. It has now become crucial for people to understand the concept of keeping wealth changing hands. The infinite banking concept happens under the radar and it is more than just insurance value or any other asset.
Fraction Reserve Banking system
As banks need to continuously lend out money, they use the fractional banking reserve system. Use of this system indicates that these banks use the Infinite banking concept on way or the other. Banks think of money differently as compared to the general public.
The OPM Rule
OPM stands for Other People’s Money. By other people these banks refer to “you”. All the banks use this OPM principle, which they acquire money from you. They get your money and make loans to other at varied rates. All these banks need to maintain a certain amount of funds. This baseline of funds is known as reserve requirement.
Banks have the entire scenario figured out. A bank can loan out 8 to 10 times the money they have in their reserve. They are not slowed down if they don’t have enough liquidity in the reserves.
The velocity of money and infinite banking concept
The former is a term not known by people in general, whereas bankers are well aware of this particular terminology. It is the idea that money can never stay stagnant and needs to move from one hand to another. The faster it moves the more profit banks gain. The banks ask you to store your money with them. Now that they have your money stored with them, they make loans out of it. The banks convince the people that keeping money safe for a long period of time will make them good returns. Money is often found sitting idle in banks, gaining 0.1% interest. You need to know that making your money sit stagnant will result in its devaluation.
Quick side trip: the banks convince you to store your money with them so they can use it (exponentially multiplied) to make loans. They do this by convincing you that your money needs to be kept safe and that compounding interest will be enough to offer a great return.
Let us consider moving your wealth with a real estate example. Suppose you have to invest $100,000 and you have the following options:
A: Gain a steady cash flow of $400 per month
B: Hold a property long term and secure the appreciating area
C: Buy a real estate and resell it within 90 days for a small amount of profit.
The 3rd option is the best as it involves movement of money. Property C gives you the ability to retrieve your money and duplicate the effort. With Properties A and B, you’ll miss out on potential lost opportunities. This idea applies to many areas of investing in addition to real estate.
Compounding growth free tax
Now that you want a wealth building strategy that allows you to make more money by using borrowed money, you need to keep the velocity of money in mind. Moreover, maximizing leverage through growth is also of prime importance. Let us discuss this with an example of compound interest.
Tax free environment is most important. Saving taxes of things you are allowed to can help you boast your finances in a matter of days. Consider “A penny doubled every day for 30 days example”. If given a choice between $100,000 today and getting a doubled penny every day for 30 days, one needs to opt for the penny option. So the equation goes, the amount that started with a penny and doubled every day looks pretty tame until about day 20 when the numbers take off. On day 30, the total amounts to a whopping $5,368,709.12 in a tax free environment. But when it comes to the 30% tax net, the entire amount gets limited to $48,196.86.
Tax free growth is an unbeatable advantage. Banks gain this environment and as a result they flourish.
Why the critics are missing the point?
People talking finances consider infinite banking concept as a scam. They believe that it is done just to increase the cash value of life insurance as an investment. Harnessing the velocity of money in a tax free environment is something you need to seek out. When you focus on earning money exponentially, you will forget about the cash value of life insurance and consider it as a place to borrow money at low rates.