Thanks to the current financial media, when most people think of wealth building, they think of investing and wealth accumulation. What we want people to understand is that there is so much more to wealth building, and accumulating the biggest pile of money isn’t as effective as creating a liquid pool of money that can MOVE. In fact, if you’re only thinking about accumulating money and locking it away, you can stifle the movement of money and slow its velocity, which in turn limits your cash flow.
The financial media teaches us to “Accumulate first, then Disburse.” Save and invest to accumulate ample assets—generally in a 401(k) and other assets based largely in stocks and mutual funds. Then someday, when you accumulate “enough” money in your accounts, you can stop working, begin the distribution phase, and live off of your assets (or the interest your assets produce). Right?
In Busting the Retirement Lies, I detail why this thinking is so harmful and show other options. Today, I want to critically examine one piece of the formula: the idea that accumulating money should be our primary financial goal.
Wealth accumulation is the goal of most investors. Everybody desires to have enough money, though there is much debate about how much is “enough.” People strive to accumulate an amount of money they think will free them from ever having to worry about money again – or at least, they’ll never have to move in with their kids!
But we believe that wealth accumulation built upon the “Accumulate first, then Disburse” model is dangerously FLAWED.
First: Wealth Accumulation Alone Relies on Guesswork and Speculation
How do you know you’ll have “enough” money? While the typical financial planner may rely on mathematical formulas, those formulas use numbers that are nothing but speculation, generalization, extrapolation, and GUESSWORK!
How many people thought they had nearly “enough” to retire on, yet were derailed by huge losses during the Financial Crisis? How many people believe Dave Ramsey when he says—without proof—that they can expect about 12% returns from the stock market? (We cover this and more in our Dave Ramsey review.) Or how many people have already retired, only to discover that low-interest rates or inflation have left them with less cash flow than they need or desire?
When you make assumptions about your future, and create a benchmark based on those assumptions, you run some very real risks. We cannot presume to know what’s going to happen in the future, so a more flexible strategy is warranted.
Second: CASH FLOW is What We Actually Live On
Put simply, the importance of cash flow is this: cash flow is income. It’s the money coming into your life that you get to use. Unfortunately, the accumulate-first-then-disburse model leaves many people AFRAID to spend their principal! We see this all the time—people accumulate perhaps even millions of dollars, yet are afraid to USE any of it! And while there’s certainly value to having “money you don’t spend,” there’s a better way than living in fear.
You’ve heard it said that “It doesn’t matter how much you make, only how much you KEEP.” Yet we think it’s more accurate to say that it doesn’t matter how much you make, how much you keep, or even how much you save—it only matters how much you can SPEND after you’ve earned it and saved it!
If the purpose of accumulation is to provide income in later years, why not concentrate on strategies proven to generate cash flow? Or if you do focus on growth, wouldn’t you want a stellar “exit strategy” to shift your assets from growth to income when the time comes?
Third: Typical Wealth Accumulation Puts Money Out of Your Control
Typical financial planning TELLS you to accumulate the biggest possible pile of money—money that isn’t in your control and that you’re told not to spend!
So you work hard and throw a portion of your income into 401(k)s, IRAs, perhaps a taxable brokerage account, and a 529 plan or two for your children’s education. Assets that can only be used for limited purposes at specific times. Accounts we can’t access without paying taxes, penalties, sales charges, and perhaps even commissions and fees. (This says nothing about how you’re diluting the power of your money by spreading it between so many accounts.)
Meanwhile, the financial institutions and even the government benefit from the accumulation. They leverage it, or tax it, or collect fees for sending you quarterly statements letting you know how “your” money is doing. They may even keep a portion of it when you die by taxing your beneficiaries.
Fourth: Wealth Accumulation Isn’t an Effective Wealth-Building Strategy
It keeps money stuck, trapped, and inefficient.
Money is a lot like water. It stagnates when it sits. It becomes unproductive, useless, and goes to waste. You want to keep water moving and flowing!
The alternative to stagnation and the flawed “accumulate now, disburse later” idea is to USE your money by keeping it in MOTION!
Move money THROUGH your assets, not just TO them!
Just as LIFE depends on the movement of water… evaporation, rain for crops, flowing rivers for fish, water for drinking and usage… so PROSPERITY depends on the movement of money.
You may be aware that consumer spending—the movement of money—makes up most of our economy. Yet we’re not trained to move money in our personal economies, we’re taught to accumulate it and let it sit in various types of accounts, sometimes unused for decades!
We’re taught to focus on the volume or size of our assets—not the VELOCITY of our assets! Yet increasing the velocity of your money is key.
Why the Banks Favor Cash Flow Over Wealth Accumulation
Savvy business owners, corporations, and bankers know how to keep money in motion. If banks acted the way they teach us to act, they would keep all of their deposits sitting in the vault unused! And they’d go out of business, unable to compete or turn much of a profit.
Of course, banks USE it, leverage it and multiply it, and generate enormous profits… much higher than what we imagine.
People think that when banks pay us 1% on our savings and allow us to borrow money at 4%, they are earning 3% on that transaction—4% earnings subtract 1% cost. This is NOT correct. When a store owner buys a widget for $1.00 and sells it for $4.00, they are enjoying a 300% profit!
It is the same with banking. When the cost of attracting dollars is one-fourth the cost of loaning those dollars, banks are enjoying a 300% gain. (And that’s BEFORE they create money through the process of fractional reserve banking, which we’re NOT a fan of, yet that’s another topic.)
Moving Money THROUGH Assets Beats Wealth Accumulation Alone
Infinite Banking, a concept popularized by author Nelson Nash, teaches us to move money through assets such as whole life insurance. Moving money increases its velocity and speeds up wealth-building.
Want to buy a rental property or invest in a business? By leveraging your own money for a down payment or a cash-flowing investment, you can actually generate more efficient cash flow! (In this post on finding the best real estate deal, you can see that through investing OPM—”other people’s money”—you can accelerate the return on your own dollars.)
Will you need a car in two years? By saving the money in a cash value account and then financing your own vehicle (either through the insurance company or through a bank, using the cash value as collateral), you get the car AND you get to keep your savings working for you, long after you pay back the car loan you leverage with your cash value.
The Importance of Cash Flow to Prosperity
You can let money “sit” and accumulate in your cash value account and you will experience safe, steady, modest growth. This is a perfectly acceptable way to use whole life insurance. In fact, we don’t recommend wanton spending by any means. Yet the perk of having a leveragable account like your cash value is that you CAN use it, whenever you want, without necessarily robbing your future self. And depending on what you do with it, you can invest in more cash-flowing assets and create an entire financial ecosystem for yourself.
Find reliable investments where you can generate double-digit returns. Pay off or avoid using high-interest credit cards or equipment loans. Put a down payment on a second home you can rent out when you’re not using it. Buy income-producing assets rather than putting your money where you “hope” it will earn a good rate of return. These are just a few examples of what’s possible.
By using your money wisely—rather than just letting your banker or brokerage house use it—you can:
1. Grow Your Asset Base
Use money from one asset to purchase another asset, such as using cash flow from a bridge loan to pay life insurance premiums, or leveraging life insurance cash value for a down payment on a property. The former can help you save money into life insurance (paying premiums), while freeing up additional cash flow in your personal economy by not paying premiums). The latter can help you accumulate assets without opportunity costs, because your cash value continues to compound uninterrupted.
2. Increase Your Cash Flow through Leverage
When you purchase a cash-flowing investment, you increase your spendable cash flow. Ideas of cash-flowing investments include (yet are not limited too):
- First deed of trust mortgage contract
- Cash-flowing investment property
- Equity investments in apartment buildings
- Loaning a family member money at 10% to pay off a 19% credit card
- Buying a laundromat, ATM network, or storage facility
3. Build Wealth Safely and Soundly through Diversification
You may be thinking: Isn’t diversification having a bunch of different accounts, like a 401k, an IRA, and some 529 plans, as mentioned above? While you may think so, this leaves your money spread thin, and each account relies on you locking up your money for a single use. You may be able to accumulate, yet your ability to use that money for opportunities is practically non-existent. And because it’s tied up in the stock market, you’re liable to lose it in a market crash, with no real control.
By saving money into whole life insurance, you can use your dollars for ANY purpose. Plus, your pool of money replenishes as you repay loans, all while your cash value grows. Over time, this means you can diversify into assets that create cash flow, like some of the ideas above, that are much less volatile. Ownership, not accumulation, is the foundation for prosperity!
4. Decrease Taxes
By moving money from regular income to capital gains, you can lower your taxes.
5. Control Your Money
Prosperity is not measured by how much money you have. It’s measured by how much FREEDOM you have with your money.
You can free your money from government control by only investing up to your 401(k) “match”—not the max level.
You can free your money from the whims of the stock market by investing in non-correlated assets. And you can increase your control by simply saving more and increasing your liquidity… then putting those dollars to USE.
Is YOUR Money In Motion?
The first step to putting your money in motion is to SAVE. (Yes, that does mean there’s some wealth accumulation involved.) The secret is to save into a vehicle like whole life insurance that is liquid, flexible, and can be used for many purposes. This is how you build your emergency fund and opportunity fund. And not only can you use this money, you also protect your legacy with it, thanks to the death benefit. Having life insurance in place is how you protect your wealth curve for your whole life. If you’re ready to start saving into whole life insurance so that you can open yourself to opportunities, contact us here or email firstname.lastname@example.org. We’d love to be a part of your journey.
For more on our Prosperity philosophy and the strategies we recommend, you can learn about our 7 Principles of Prosperity™ through our complimentary Prosperity Action Pack.