What if there was a way to access cash whenever you needed it without draining your savings, investments, or selling your assets?

Welcome to the concept of Infinite Banking. A concept first penned by R. Nelson Nash in his book, Becoming Your Own Banker: Unlock The Infinite Banking Concept.

Infinite banking typically involves obtaining a whole or universal life insurance policy to use as a personal bank account. Here’s the gist:

• You invest in a whole or universal life insurance policy. This builds cash value over time, like a savings account, but with a guaranteed interest rate (whole life) or variable rate tied to an index (universal)
• Instead of relying on traditional banks, you borrow against this cash value when you need money. You pay back the loan to yourself, with interest.
• Proponents say it gives you more control over your finances and avoids traditional loan applications and fees.

Think of it like this: You’re creating your own mini-bank inside your life insurance policy.

Important points to consider:

• Infinite banking works best if you can consistently pay high premiums to build up the cash value.
• There are fees and costs associated with whole life insurance, so make sure you understand them before diving in.

Using an insurance policy has some downsides. They’re best explained by this video:

The downsides are mainly in the opportunity cost, high initial investment, and lack luster returns.

The upside? The policy provides tax benefits (when the policy is paid out, it is not taxable), a death benefit, flexible repayments, and easy access to cash.

Is Infinite Banking A Scam?

I’m not a huge fan personally of Dave Ramsey, I think he is very rigid and outdated. I also don’t think infinite banking is a scam. Whole or Universal life policies have guarantees or safeties that you can add on via the purchase of various riders that can make the universal product quite safe. However, this comes at a steep cost. Namely low returns. I suppose it may have a place in some plans, for example, people who have the cash to purchase the policy and who are risk adverse.

My appetite for risk is very high. I have invested in a condemned house, purchased rural land, left 95% of my wealth in a bag of internet tokens and lost my annual wage in a few minutes probably 2 or 3 times in my life and didn’t jump off a building. To me, money is just energy and I can always find more of it, because I know where to look and how to generate it.

Part of why I can take on so much risk is because I have a pension at work, and similar to an insurance policy, it has guaranteed income. I’ll also get social security (lol maybe), and have the option of working even after I retire on a part time basis for my current employer. I also have a house payment that’s so small I could pay it working at McDonald’s part time. Everybody is different and your appetite for risk may be lower than mine or you may have a different set of circumstances. As they say, different strokes for different folks. What’s right for me may not be a good fit for you.

Disclaimer: The following strategies are not financial advice. If done incorrectly they could lead to a total loss of your assets. These strategies are for demonstration purposes only, and can be simulated on a paper trading account or using a spreadsheet. Trying any of these out with real money is at your own risk.

Home Equity and Stock Portfolios

I spent time this evening looking into alternative ways to build an infinite banking system but without the potential downsides of low returns, complexity and the high expense of a life policy. So far I’ve identified three potential options.

• Home equity – Similar concept, but instead of life insurance, you use your home equity as collateral for loans. This can be risky if your home value falls.
• A Personal Line of Credit: This actually works pretty well for paying off debt quickly but it’s a terrible savings product.
• Stock/ETF portfolio margin – Here, you borrow against the value of your investment portfolio. This can be lucrative but also risky, as investments can fluctuate.

Home Equity:

If you own your own home, you may have a substantial amount of money trapped in the home that you can’t access.

A home equity loan is popular option, some of them come with a credit card option. The problem with this concept is that using your equity this way results in minimum payments. What makes infinite banking so sexy is that people who borrow against an insurance policy, there are no minimum payments. In fact, you don’t have to pay the loan back until you die. This will result in a lower death benefit, but making repayments are optional.

Another option is to enter into an equity share agreement where a person sells part of the equity in their home. In this case, repayments are optional, and there is no interest to accrue. This is because selling your equity does not result in a loan.

However, if the value of your home rises by just a few percent per year, you can easily find yourself needing to buy back the equity in your home at a very high cost, perhaps at twice the price that you sold them at.

In the scenario I ran, over 10 years it would cost me an additional $130,000 to buy back the $100,000 worth of equity I sold for a total repurchase amount of $230,000. That’s much more expensive than a traditional heloc. In my area, home values have outpaced inflation by a lot. It just doesn’t make financial sense to me, but your situation may be different.

Worse, in some cases the buyer of your equity agreement may have the option to force a foreclosure if you do not refinance or repay the shares some other way.

Personally, I would never use this method unless I had no other option and needed to make repairs or get myself out of a serious situation quickly. It could also be useful if the value of your home is decreasing or if the home is going to be sold in short order.

Of course if more equity exists, you may be able to sell a more to pay off the old, but to me, my home and my sub 3% mortgage are way too valuable to mess around with.

This is where we entertain the idea of a personal line of credit. These lines of credit are not secured by your real estate but likely have low limits and high interest rates. I have one from a local credit union that has a card option as well as instant cash transfers to my bank account. The rate was 10% lower than a credit card balance I acquired during Covid, so I moved it to the line of credit and am paying it off quickly by putting all of my income on it each month. Some might ask… “don’t you need your income to live?” And yes I do! I use the headroom on my line of credit to pay my bills. What this does is maximize the use of my money to reduce my balance for as long as possible before needing to pay a bill. The first month I did this was June 2024 and it was going to reduce my interest by half. I should have this balance reduced to $0 within 4 or 5 months.

Using this trick to eliminate a balance is a great idea, but it’s not so great for saving and it’s not really “infinite” if you have a $10,000 or $20,000 limit.

Using Your Stock Portfolio:

Another way to do infinite banking would be with your brokerage account. When you own shares of stock, you can borrow a max of about 50% of the value of your shares on the fly. While this is normally done to buy more shares, it can be used to withdrawn cash.

Margin interest rates are more variable than the interest rates on a whole life policy, additionally, market fluctuations can force you to liquidate your portfolio at an all time low.

You’d have to choose the right stock or ETF to make sure that your portfolio was relatively stable. Some conservative investors might use an inflation protected bond fun, a precious metals ETF like IAU or SLV. Personally I would most likely choose SPY or VOO, an S&P 500 index etf. There are other etfs meant to protect against volatility but they have some draw backs, namely that they have less liquidity which can be a challenge if you need to include an options component, which this strategy will employ.

Why I Would Choose An S&P 500 ETF:

S.P.I.C.E: The S&P Indexed Cash Engine

SPY and VOO track the S&P 500, which is an index of the top 500 companies trading in the US stock market.

These are companies like Google, Apple, Tesla, etc. when you buy SPY or VOO or another S&P 500 based index, you are buying into all 500 of these companies simultaneously. It’s a slice of a pie currently worth 42 Trillion dollars, or roughly 2x the annual output of the US GDP.

While the entire economy can suffer, this index is as safe as a stock market can be. Short of an alien invasion, WWIII, or another 9/11 this index should be extremely resilient. Sure you can see significant drawdowns, during events like a global pandemic or a terror attack, but most of the time it just keeps chugging. In fact, according to the AI I’ve asked it only has returned negative returns 28% of the years it’s been tracked, and over shorter periods of time, such as the last 10 years, only 5% of the time. It’s returned negative years back to back only 2 or 3 times in its entire history.

This is not to say it cannot be volatile, but unlike owning shares in one company that can implode overnight due to an accounting scandal or some other unforeseen event, the S&P will not go bankrupt or implode. The companies in this index are worth 300b to over a trillion dollars each. So while there is market risk, you are at risk of large market wide events that affect the entire economy and less prone to random events that affect one company.

Returns:

The S&P has averaged 10-12% consistently for 20-30 years. If we can put our money into the S&P, we van reasonably conclude that we can expect to generate a return if the horizon of time is long enough. Doing the math, just 15 years of making monthly $2,000 deposits would have yielded a portfolio worth nearly $2,000,000 today.

The problem is, sometimes we need to access money for emergencies, like home and auto repairs, medical and vet expenses, and just routine maintenance of our other tools and electronics.

When this happens we’re forced to raid our savings accounts, or worse borrow against expensive high rate credit cards.

Building your S&P “infinite bank” account means that you can use your margin account to borrow against your shares, with no minimum payment, and at a low rate of interest.

In fact right now the rate of interest is 6.75%. This year the S&P has returned about 30%, that means if you needed to borrow money against your portfolio, you would have paid 6.75% in interest on the loan but the assets you borrowed against were still invested and generating a return of about 30%. That means you earned 23.25% more (before taxes) than if you would have sold your stock to pay your bills instead. Rather than paying 30% interest on a credit card, you were paid to borrow money. What a huge difference!

Of course the S&P can go down too, but as long as you managed your margin loan correctly, you would not be immediately affected and over time the portfolio would likely, based on the last 30 years of history, generate a substantial return over the next years.

But there is a way to protect the downside as well.

Puts: Protection Until Trigger

The great thing about the market is you can insure your portfolio against loss using a put or if you’re even more sophisticated you can use a strategy that employs multiple options contracts to protect your portfolio even more efficiently.

A Put is an option’s contract or an agreement between two parties. The person who sells a put receives a fee or premium for agreeing to buy your shares at a certain price. This is called the strike price. The buyer of the Put has the right but not the obligation to exercise the option to sell 100 shares the strike price anytime they choose before the option expires. This is where we get the acronym Protection Until Trigger. The contract is insurance that protects you until you pull the trigger, at which point it becomes cash.

In this scenario above, a person with at least 100 shares of SPY would most likely want to protect the portfolio against black swan events. If they’re budget minded they may buy a lower strike price to protect their initial investment only, or they may be more inclined to buy a higher strike price to protect their returns.

Before attempting to take this strategy on, you must have a solid understanding of how Puts work. There are resources online to learn more about Puts including for free on Youtube.

If you want to try this strategy out, open a paper trading account somewhere and simulate how you would use it.

Options pricing is complex, but if you understand how it works, you can reduce your cost by making sure to sell your put before it expires and buying a new one to keep your coverage going.

Option’s pricing is determined by metrics called the “Greeks”, they include:

Delta (Δ): Measures the rate of change in an option’s price relative to a change in the underlying asset’s price. It essentially tells you how much the option’s price will move for every $1 change in the price of the underlying stock, bond, or other asset.

Gamma (Γ): Represents the rate of change of Delta. It reflects how quickly Delta itself changes as the underlying asset price fluctuates. Gamma tells you how sensitive the option’s price movement becomes to further changes in the underlying asset price.

Vega (V): Measures the sensitivity of an option’s price to changes in implied volatility. Implied volatility reflects the market’s expectation of how much the underlying asset’s price will fluctuate in the future. Vega helps you understand how a shift in volatility expectations might impact the option’s price.

Rho (Ρ): (Less common than the others) Measures the sensitivity of an option’s price to changes in interest rates. This is particularly relevant for options on interest-rate sensitive assets like bonds.

Theta: Theta represents the rate of time decay in an option’s price. As time passes closer to the expiration date, the value of the option contract gradually erodes. Theta reflects this phenomenon.

Theta is the primary one we will be concerned about when buying Puts to protect us against downside risk.

Options with more time lose value slowly at first and then rapidly towards the end. Price Volatility (Delta) also impacts the price of an options contract.

In option’s pricing, the Greeks are provided as numbers. These numbers don’t need to be understood to use a Put as an insurance contract. However understanding them and how they play into options pricing can help you see if the underlying asset is increasing in volatility.

For our purpose, the safest route would be to buy a long term contract and swap it out as needed. The triggers to swap out a contract are time or upward price movement above the strike price as both of these will eat away at the value of your option contract and the goal is to have a long runaway of protection to keep the price low. The further your underlying asset (SPY in this case) moves away from the strike price, the less likely it is that SPY will close below the strike price at expiration, which means it will expire worthless. Volatility affects the value of your option contract more when there is less time remaining before it expires.

Remember: These alternatives have their own set of risks and considerations. It’s important to do your research and consult a financial advisor before going down these paths.

So that’s my strategy for building an infinite bank, but there is a lot more to it, like managing the portfolio, margin account, and protection. I’ll write more about this over the coming weeks.