Velocity Banking vs. Infinite Banking
Are you a wealth creator with a need to have access to cash in the safest way that puts you in control? Velocity Banking shows up again and again as a solution to pay off your home faster and save interest. It even appears as the ideal way to store up equity in your house to use for investing. And, to add confusion, it sounds a lot like Infinite Banking, with a similar objective of taking the banking function into your own hands, so you achieve independence from the bank profiting on your money and requiring their permission for you to use it.
To further muddy the waters, Nelson Nash’s book, Becoming Your Own Banker, is often cited as the foundation for both strategies. (However, Nelson wrote the book as the foundation for the Infinite Banking Concept, which he promoted through the Nelson Nash Institute.)
But what is the Velocity Banking strategy, and what are the risks? How does it compare to Infinite Banking? And which approach gives you more control?
This episode is for every wealth creator who wants to have access to cash in the safest way that puts you in control, so you’ll never get caught in a cash crunch.
Today, we’ll reveal the three reasons Velocity Banking is a poor alternative to Infinite Banking for building investible capital.
- Velocity Banking doesn’t provide safety
- Velocity Banking doesn’t guarantee access to your cash
- Velocity Banking doesn’t give you a rate of return
First, What Is Infinite Banking?
Infinite Banking (also known as Privatized Banking) is a strategy of using a specially designed, dividend-paying, high cash value whole life insurance policy with a mutual company as a place to store cash. As you build up cash value, you have access to use it through withdrawals or policy loans.
The result of Infinite Banking is that your cash flow, or surplus, goes into a life insurance policy, where it is stored in cash value.
And What Is Velocity Banking?
In short, Velocity Banking is a strategy of using a line of credit to pay off your house faster, while saving interest.
The strategy includes variations such as opening a 0% interest credit card and moving balances of debt from other liabilities to the credit card and then paying off the credit card fast, using a home equity line of credit (HELOC) or even replacing your mortgage with a 1st lien HELOC. Depending on how you use this strategy, proponents demonstrate how you can fully pay off your home quickly, usually between 5 – 10 years.
However, the debt reduction isn’t simply a result of the HELOC product itself. Instead, the results are achieved by the strategy of cash flow management you use with it.
For the fastest debt payoff with Velocity Banking, you would use the line of credit as your bank account, putting all your money in each month and paying your bills out of the line of credit. The difference between your income and expenses each month results in an extra payment to the line of credit that decreases the balance owed and increases your equity.
Then presumably, you can use the HELOC as a checking account to pull out equity any time you need cash or investment capital.
The result of Velocity Banking is that your cash flow is directed into home equity, where it is stored.
Velocity Banking vs Infinite Banking: The Single Clarifying Question You Need
This article compares the eventual outcomes of the two cash flow management strategies of Velocity Banking and Infinite Banking. This is the bottom-line question: Which is the better place to store cash?
If I had to choose just one of these strategies, I’d pick Infinite Banking, because of the guarantees, certainty, and control I gain, that Velocity Banking just can’t provide.
STOP. Before you read further, you have to know this:
We are not anti-HELOC.
Securing a HELOC might be a prudent financial move to provide additional options when you need access to funds or want to put lazy money to work. For instance, you can use the home equity of your primary residence to purchase cash-flowing investment properties. We’ve even helped people use their equity to buy investment property.
We call high cash value life insurance the “AND Asset” for a reason.
Infinite Banking isn’t meant to be your only financial strategy in your toolbelt. It’s intended to complement and accentuate your investing strategy, boosting returns and accelerating your cash flow.
Infinite Banking is like a golden key that unlocks and enhances every other area of your financial life.
Here’s Your Quick Glance Comparison Between Velocity Banking and Infinite Banking
Now, when I say that Velocity Banking is a poor alternative to Infinite Banking, here’s what I mean:
The Underlying Assumptions of Velocity Banking
The mainstream financial thinking makes sweeping assumptions about what’s right and wrong for everyone to do with their money.
Their power is that they sound like practical common sense.
But the problem with conventional thinking is that it achieves typical results. If you want to build uncommon wealth, you need to elevate your thinking.
Here are the underlying assumptions of Velocity Banking:
- If you have a liability, you are in debt.
- You should pay off all debt first before working on any other financial goals.
- You should pay off debt as fast as possible to save interest.
- Equity in your house is savings, and a HELOC is the best way to tap into that equity.
But, if you follow this logic, Velocity Banking’s assumptions are a landmine that robs you of control.
We’ll quickly zip through the first three assumptions because we have volumes of content on these foundational topics.
Then, we’ll dig into the last assumption because that’s where you discover the crux of the question: which strategy results in the best place to store cash?
Financial Principles and Truths That Put You in Control
Instead of accepting the common assumptions of Velocity Banking, let’s find the bedrock financial truths that will put you in control and help you to prosper.
Liability ≠ Debt
With Velocity Banking, the goal is to outrun “debt” as something bad that you feel guilty of having in the first place.
This view altogether misses the real definition of debt.
DEBT = Negative Equity
Stated another way, you are in debt when your liabilities exceed your assets.
The typical approach has you needlessly trying to become “liability free.”
Instead, you should evaluate each liability individually to determine whether to keep it or pay it off.
Just because you have a liability doesn’t mean you’re in debt. And it follows that just because you have a liability doesn’t mean you should pay it off.
Debt Payoff Should Be Strategic
You should attack your debt strategically, not with a battering ram.
That’s because not all debts are equal.
Some debts are more efficient than others, and it can actually slow you down to focus on paying them off. Other debts require immediate attention and should be paid off as soon as possible.
You’ll want to pay off the liabilities that free up the most cash flow and keep the most efficient liabilities. Find out how to do this with the Cash Flow Index.
You need personalized tactics because your strategy depends on where you’re starting from.
If your big-picture objective is time and money freedom, you want to focus on creating as much cash flow now, having healthy savings, and acquiring cash-flowing assets.
That’s why you should prioritize savings, even above paying off most, if not, all liabilities, depending on your specific situation.
If you try to climb out of a hole you aren’t in, you’ll never realize that starting now to build assets is possible, safer, and puts you in the most control, even with an outstanding liability.
That’s because when you have cash you control (asset), you’re in a much safer position than if you have no liabilities. If something goes wrong, you have money that you can tap into and access for any reason.
Saving Interest ≠ Control
If you focus on interest, you won’t notice when your interest-saving strategy robs your control right out from under your nose.
To be fair, paying off liabilities faster does save interest. But that’s not the end of the story. You still have the opportunity cost to contend with – what you aren’t able to earn because you used up your cash.
And often when you prioritize paying off your house, the opportunity cost is much higher than the interest you save.
That is because your mortgage is likely your most efficient liability.
The other factor to consider is the question: Does paying off your house put you in control?
Control is when you minimize the risk of financial stress and worry because you always know you have money you can use if something comes up.
In financial terms, you get control when you have cash and cash flow. Then you can be confident that you have money you can get to, and you have streams of future discretionary income that aren’t already allocated to required expenses.
So, by paying off liabilities fast, you may win the interest battle. But at what cost?
With Velocity Banking, you lose in the bigger picture because all your cash flow was funneled into an asset you may not be able to get it back out of.
Now, here’s where the rubber meets the road.
Home Equity ≠ Savings
Home equity isn’t really savings, and you may not be able to access it.
To be true savings, an asset must have maximum safety and liquidity. A side perk is that it also has the most competitive growth. That means you need a guarantee that it won’t drop in value, the ability to access and use the asset by easily converting it into cash, and the highest growth rate for that type of asset.
Home equity fails the savings test on all three accounts.
First, it isn’t “safe” because it can drop in value.
Second, it isn’t liquid because you’re not guaranteed to be able to convert it to cash.
Finally, home equity has no rate of return.
This brings up the question, Would you want to put all of your cash into the four walls of the house, or into something else?
Let me explain:
Velocity Banking Doesn’t Provide Safety
This one is fairly self-explanatory.
Safety is the opposite of risk. It means the asset won’t drop in value.
A safe asset doesn’t lose value. In contrast, an asset with risk can lose value.
With Velocity Banking, your equity can be lost if the housing market has a downturn. So, because equity isn’t guaranteed, it isn’t “safe.” You can’t project a future value with certainty.
However, with Infinite Banking, your cash value grows with contractually guaranteed interest, plus non-guaranteed (but highly anticipated) dividends. And, every time your cash value grows, the growth cannot be undone. That means that both interest and dividends, once applied, set a new floor for your cash value, You’ll never drop below that dollar amount in the future unless you take the money out.
That means that you can project exactly what your cash value dollar amount will be, at minimum, at any given future point.
Velocity Banking Doesn’t Guarantee Access to Your Cash
That’s because to access home equity, you’ll need to sell your house, or qualify on the bank’s terms for a loan or a line of credit.
And you aren’t guaranteed the bank will say yes. To qualify, you’ll usually need a credit score over 680, at least 15 – 20% equity, and generally have a debt-to-income ratio of under 43%.
You Can Only Access Equity During the Draw Period
However, even if you already have an existing HELOC, you’re not home free. An open credit line is still not a guarantee you’ll be able to access and use your equity.
The first reason is that you can’t use your revolving equity line during the whole HELOC.
That’s because The HELOC has two distinct chunks of time: the draw period and the repayment period.
During the draw period (usually 5, 10, or 15 years), you can access and use your equity as easily as you’d use an account balance in a checking account.
However, once the draw period is over, you enter the HELOC’s repayment period, during which, your access to the equity is barred, and you can’t use it or draw it down as you’d been accustomed to doing.
One solution that allows you to access your equity after the initial draw period is to refinance into another HELOC. Again, however, there’s no guarantee the bank will permit you at that future date.
The Bank Can Freeze or Reduce Your Credit Line
The second reason you don’t have guaranteed access to your equity is that the bank can reduce your limits, or freeze your access. Clauses for the bank’s ability to freeze HELOCs include loss of property value (such as in a down real estate market), or job change or loss where they believe your ability to repay has become restricted or impaired.
During the 2008 crisis, a colleague’s HELOC was reduced from $150K to $36K, along with many others. You can read from everyday sources like CBS, CNBC, and Seattle Times, about banks freezing HELOCs so you couldn’t draw out equity on an open line.
Also, banks restricting access to home equity through HELOCs isn’t just a thing of the past.
In today’s current adverse economic conditions, multiple banks have closed the ability to get a new HELOC.
As of April 2020, both Chase and Wells Fargo are no longer accepting applications for HELOCs. That means that if you were counting refinancing to get a new draw period or open a HELOC for the first time, you might not be able to do so.
The point here is that with Velocity Banking, you shouldn’t think of equity as a two-way valve that you can always put money in and guarantee that you’ll get that money back out.
Infinite Banking Gives the First Right of Access to Policyholders
In contrast, with Infinite Banking, you have a contractually guaranteed access to your cash value. You have the right to use your money through both withdrawals and policy loans.
That means that you don’t have to worry about being granted someone else’s permission to use your money. When you use Infinite Banking to store cash, you’ll be able to get cash for whatever you need. That’s why whole life insurance is the ideal emergency/opportunity fund.
Velocity Banking Doesn’t Give You A Rate of Return
Many think their home is a good investment because you can often sell for more than you bought it for. However, your equity does not have a rate of return.
The easiest way to see this is to consider two houses, side-by-side, one with a mortgage, and one fully paid off. Imagine a brand-new movie theater is built next door. In that case, both houses will appreciate in value, without discrimination as to the outstanding balance due.
So, appreciation in value is independent of equity. It’s not your equity that earns a return, but the asset itself. And your house appreciates regardless of how much equity you have.
Infinite Banking Allows You to Earn A Returns on the Same Money In 2 Places at the Same Time
Here’s where Infinite Banking shines the brightest.
Infinite Banking doesn’t just give you a rate of return. It’s also a consistent, predictable, positive return inside the life insurance policy itself.
And, your cash value continues to earn a return, even when you borrow against it. That means you can earn a return in two places at the same time.
So, your money works harder for you because you get a predictable internal return on your savings. And also, you can leverage those savings into an investment where you’ll get an external return at the same time, with the same money.
On top of that, life insurance also provides an eternal return by providing a death benefit to future generations.
Velocity Banking can’t compete in that league.
Would you rather dump money into a HELOC that earns no interest, or into cash value life insurance that always earns a return even when you borrow against it?
How Infinite Banking Puts You in Control
With Infinite Banking, your top objective is to build up savings in an asset with the most safety, liquidity, and growth of any comparable place to store cash.
Because you have contractual guarantees to access your cash value through withdrawals and loans, you have cash in your control.
So, here are the main points I’d like you to take away:
- Velocity Banking is risky and doesn’t put you in control, while Infinite Banking maximizes your control.
- The result of Velocity Banking is putting all your cash flow into home equity.
- Home equity isn’t savings because it can lose value, the bank still has veto power over whether you get to access your cash, and it doesn’t earn any rate of return.
- You would gain more control by directing your surplus (cash flow) into a savings asset that has maximum safety, liquidity, and growth.
- By using Infinite Banking, you store cash in the ideal bank that you can use for any emergency or opportunity because your cash value won’t drop, and you have guaranteed access to use your money.
- Additionally, Infinite Banking gives you a competitive, compound growth rate on your cash. That’s even while you put it to work in another asset.
- And that means that with Infinite Banking, you can earn a return on the same money in two places at the same time. And this makes it easier to achieve your financial freedom goals.
The big idea here is that you can have access to cash in the safest way that puts you in control. Then, you’ll never have to worry about being caught in a cash crunch.
Find Out More
To see an example of why we don’t think a HELOC is the best way to pay off your house early, get this report:
If you would like to implement Privatized Banking, cash flow strategies, or alternative investments, we can help. We’ll review your situation to help you decide what moves are best for you.
To start the conversation, book a call with our advisor team.
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