Mike Dillard explains it really well! Check it out:
First of all, it goes by many names...they are all relating to the same product: dividend-paying whole life insurance
Those who are avid Dave Ramsey followers might shudder, "whole life" is bad! "term" is the only way to go... bear with me, and I think you'll see the value in this strategy as I did.
Here are some of the names it goes by:
There are a lot of references to "bank" and "banking" and "banker." But the vehicle for creating your own bank is insurance. How's that make sense?
One of the benefits of this concept is the policy loan: taking a loan against the cash value of the whole life policy AND the paid-up additions. It's "banking on yourself" because instead of going to a bank and getting money and paying the bank the interest, you can take a loan against your life insurance cash value, and pay the interest through non-direct recognition to yourself. More on non-direct recognition later. It's one of the key aspects of this concept.
A typical bank mortgage
If you purchase a house for $100,000 at the current average interest rate of 3.92% for 30 years, the total cost including interest will be $170,213. So the bank makes $70,213 off of the $100,000 they loaned. Over 30 years, they made a 70% return or 2.33% annually. The annual return for the bank is less than the 3.92% because the money is being paid back, so the 3.92% interest rate being paid by the borrower is on less and less principle.
2.33% ??? That's not too great. Inflation is 3.2% But the bank is re-loaning that money out each time you make a payment.
Let's do a compound interest calculation on the back end. The loan payment for the example above would be $473/month. Annually, the loan payment is $5,676. Let's say the bank put your loan payments to work at the same interest rate of 2.33%
How the bank invests the loan payments...more mortgages to other borrowers
The bank takes that $5,676 annual amount and invests it in other mortgages paying them 2.33% and turns those payments into $248,202.33 over 30 years. If you want to check my math, the compounding interest calculator I used is below:
So now the bank has made $70,213 plus $248,202.33 off the original $100,000 loan. That's a total of $318,415.33 or 318% return over 30 years. 10.6% return annually.
Wow! Banking is a pretty good business! But where did the $100,000 come from in the first place? It comes from depositors, people or businesses who have checking/savings accounts. The bank pays a very small amount of interest to the depositors and then takes the money and makes loans, then takes the loan payments and makes more loans, takes those loan payments and makes more loans...it just keeps going.
"Creating your own bank" is a concept that allows someone to capture the interest of their dollars, instead of giving them to the bank.
Anyone who wants consistent income, who plans to take loans from banks for houses, cars, starting a business, or purchasing rental properties, someone who wants to build wealth over their lifetime, and not just get rich quickly...you can't get wealthy quickly. "Rich" and "wealthy" are different...
As an entrepreneur and an investor, I've learned the biggest threat to my financial independence and my ability to consistantly save and invest well is myself. The biggest threat to your money can be you! For more on this, check out Video 5 under Step 1
I like this concept as an entrepreneur because a set amount is set aside monthly into an account that has multiple benefits:
Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. - Proverbs 13:11
I wondered the same thing. Here's NerdWallet's opinion: "No. It’s certainly not for everybody. There are a number of factors that have to be in place for the concept to work well. But it is not a rip-off or scam by a long shot, when properly set up."
Here are seven sites all basically recommending/selling the "Create your own bank" method to build wealth.
I'm going to combine this concept with the simple investment portfolio to round out my saving/investing plan.
To find out more about why I chose the other four categories for investing in, check out the Simple Investment Portfolio
Keeping the Give. Earn. Live. mindset, after giving away the first 10% of your paycheck, you'll "earn" or save/invest the next 10%. This 10% of your paycheck will be split as follows:
50% goes into dividend-paying whole life insurance policy
12.5% into U.S. Stocks
12.5% into Real Estate
12.5% into Corporate Bonds
12.5% into Gold
I recommend setting up an account with M1 Finance for the Stocks, REITs, Corporate Bonds, and Gold, and setting up a Wealth Maximization Account with Paradigm Life to "create your own bank." For more details, feel free to contact me.
Check out M1 Finance:
Contact Chad Hanson at Paradigm Life: