Becoming Your Own Banker® by R. Nelson Nash: A Summary
This post is my attempt at summarizing some of the core themes and ideas presented in R. Nelson Nash's "Becoming Your Own Banker," focusing on the Infinite Banking Concept (IBC) and its practical application.
I. Core Theme: Taking Control of the Banking Function in Your Life
The central argument of the book is that individuals unknowingly contribute significantly to the banking industry through interest payments on loans for various necessities and wants (cars, homes, education, etc.). Nash proposes a paradigm shift: taking control of this banking function by creating a personal banking system using dividend-paying whole life insurance policies. This isn't about investment returns or tax avoidance; it's about capturing and recycling the interest individuals typically pay to external banks.
"This book is not about investments of any kind. It is about how one finances the things of life, which can certainly include investments. It is not about rates of return...the process of banking goes on no matter what is happening."
"The banking business is somewhat like that. Money flows from the pool through our hands to meet our needs—but somewhere in the process it all ends up back into the banking system. It is all a matter of 'how much of the banking function do you control as it relates to your needs.'"
"I am demonstrating that one can use dividend paying whole life insurance to solve one’s need for finance throughout one’s life."
II. The Infinite Banking Concept (IBC) Explained
The IBC involves using dividend-paying whole life insurance as a personal "banking system." Key aspects include:
Financing Everything: Recognizing that all purchases are "financed" either by paying interest to others or forfeiting potential interest earnings. "YOU 'FINANCE' everything you buy. You either pay interest to someone else or you give up interest you could have earned."
Creating an Entity: Establishing a system (the life insurance policy) that generates income from loans, mirroring the function of a traditional bank. "CREATE AN ENTITY—A plan—which you control and it makes money on your loans. One such entity can be a life insurance plan."
Policy Owner as Primary Lender: Understanding that the policy owner has the highest priority access to the policy's cash value for borrowing, effectively controlling the investment function within the policy. "...the Owner outranks every potential borrower in access to the money that must be lent! And what he can borrow is 100% of his equity in the contract...In essence, money can be lent to the other places only if the Owner of the policy does not exercise his option to use the money (and pay interest) instead."
Dividend as Return of Capital: Understanding that policy dividends are not taxable income, but are instead a return of overpayment of premiums. "...the correct classification is a return of premium (or a return of capital) which is not a taxable event in IRS terminology."
Capitalization and Long-Term Vision: Recognizing that building a personal banking system takes time, discipline, and long-range planning (7 years or more). It is not a "get rich quick" scheme. "It is not a procedure to “get rich quickly.” To the contrary, it requires long range planning...I learned to think beyond the lifespan of my current generation." "Furthermore, I am not describing one life insurance policy. This is to be a system of policies...It will take the average person at least 20 to 25 years to build a banking system through life insurance to accommodate all his own needs for finance—his autos, house, etc."
III. Key Considerations & Potential Pitfalls
Honest Banking with Yourself: Emphasizing the importance of repaying loans to the policy to maintain the integrity and functionality of the banking system. Not repaying loans amounts to "stealing" from your own bank and will ultimately undermine the entire process. Referencing back to the grocery store example of not taking groceries out the back door without paying for them. "Loans have to be paid back or you can kill the best business in the world. It’s up to you, but don’t try to blame others when it happens."
Overcoming Human Nature: Highlighting the human problems that could prevent one from implementing the IBC, such as Parkinson's Law ("work expands to meet the time allotted") and the "Arrival Syndrome" (believing you already know everything). The importance of overcoming human nature is paramount. "All human progress is predicated on this matter. It is not easy to conquer but it is absolutely necessary."
Willie Sutton's Law: Understanding that as you accumulate wealth, you must be aware of the threat of losing it. The government is the biggest theif. Understanding how qualified retirement plans are not a true safe haven for your money and the government will change its mind and change the rules to benefit them.
The Golden Rule: The person with the gold makes the rules. Take care of it. "Those who have the gold make the rules! It can be no other way!"
Misclassification: Avoid misclassifying things as that will lead to limitations in thinking and lead to the wrong conclusions. "The whole idea of The Infinite Banking Concept started with the realization that there is a huge amount of nonsense going on in the market place because of the misclassification of things."
IV. Practical Implementation
Starting Small: Suggesting beginning with financing smaller purchases (like automobiles) to gradually build the banking system. "It is much better to attack an area that is attainable in a fairly short time—try the one about financing automobiles."
Capitalizing the System: Highlighting the need to capitalize each policy purchased for at least seven years, to the point where dividends will pay all the remaining premiums on the policy.
V. Comparison to Traditional Banking and Other Financial Products
Critique of Traditional Banking: Questioning the multiplier effect of bank lending and the potential for instability due to fractional reserve banking. "You deposit $1,000 at a commercial bank and then the bank can create $9,000 out of thin air. (My own description of what they are doing is the world’s largest con game)."
Rejection of Variable Life Insurance: Cautioning against using variable life insurance for IBC due to its reliance on mutual funds and market volatility.
VI. Overall Message:
"Becoming Your Own Banker" promotes financial independence and control by repurposing the money spent on interest payments. It requires education, discipline, and a long-term perspective, but the rewards can be substantial, creating a perpetual "tailwind" in one's financial life. It is a paradigm shift that requires readers to challenge conventional wisdom and think differently about money and finance. "This is the essence of what The Infinite Banking Concept is all about— recovering the interest that one normally pays to some banking institution and then lending it to others so that the policy owner makes what a banking institution does."