Bank on yourself by Pamella Yellen is a popular US book on how to fund purchases like cars, trips etc. In Canada this idea works, but there is some different tax rules you should be aware of.
We use Wealth in Motion which takes consideration of things like wills, real estate, TFSA, RRSPs, Vehicle insurance, liability insurance, disability, and much more…the software is about years ahead of any software used by Bank on yourself software in the US. This concept Protection, Savings and Growth has been around since 1980!!
The concept is still sound, though not as holistic as what we do. Any here is a review from amazon.com on the book.
This review is from: Bank on Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future (Hardcover)
Others may say this is hype and an infomercial but in reality it is a different way of looking at how money works. You have to get over the fact that this is a whole life insurance policy. When you really look at whole life insurance without its name (one of my good friends sales used cars that doesn’t make him a bad person) it is not so bad.
The book points out we finance everything either we pay interest to others or we give up interest on our money to an institution (ie banks). I have done this with an advisor and know others who have as well and there are no complaints (try surveying people that have been in the market for the last ten years and see if they ALL are happy with thier decision). The key here is that your money is always working for you and how the insurance company treats your loan seperate from your account.
-So if your cash value = $50,000 and you took out a $20,000 loan for a car the company still gives you dividends on the $50,000 and charges your loan the going interest rate.
-So first off you are being credited interest on $50,000 instead of $30,000 like a bank.
-Lets say the bank is paying net (after taxes) a rate of 3% and the insurance company (insurance companies costs are lower since they don’t have braches/ATMs on every corner of your city) is paying 5% and your loan rate is 7%
-In the bank you only receive interest on the $30,000 or $900
-In your insurance policy you receive $2,500 ($50,000 at 5%) – $1,400 ($20,000) or $1,100 or 22% More
-In the next year (say you paid off 20% of your loan or put back $4,000 in your savings account)
-At the bank you receive 3% on $34,900 or $1,047
-In your insurance policy you receive $2,625 ($52,500 at 5%) – $1,120 or $1,505 or 44% more!
This does not work with mutual funds because they are too volatile (we never really know what we are going to have in the future), we don’t know how we will be taxed, and we have to sell assets to get to our money.
This does not work with 401k/qualified plans because we have to wait until age 60 for no penalty (if the govt doesn’t change the rules), most 401ks are full of mutual funds, we again don’t know our tax rate, and again you have to sell off your assets
There probably are two reason people get hung up on this topic: one being that it is a whole life policy and the other is rate of return argument. People forget it is not about rate of return but rather money in your pocket. I’d rather have 2% of $100,000 than 10% of $10,000.
Although the concepts are similar there is some tax differences one should be aware of, here is some reasons one would look at this idea.
Is your principal protected during a market correction?No loss of principal due to a market downturn.
You don’t need to pick the right stocks, funds, real estate or other investments – Bank On Yourself lets you focus on other, more fun things and worry less. Imagine not having to know the best way to invest money and not having to figure out how to bump up your returns.
Should I continue funding my RRSP? Maybe. Do think taxes will be higher in the future? Does the government have control? If you get sick or are disabilied for six months or more will your bank or broker fund your RRSP for you up to age 65?
Can you use your money without selling your assets? TFSA can not work like this. For example lets say you have $10,000 in your TFSA you take out $9,000 to buy a car. How much money is earning interest? That’s right only $1,000! What if you pay yourself back the $9,000? How much interest do you get now? The $10,000 (total). Under bankonyourself for Canadians you would get the $10,000 interest as if you never took the money out!
Can you use your money without selling your assets? Yes see the above example.
Are your assets protected from creditors and lawsuits? Yes (call for details)
Call me for a different book which covers more material and is more Canadian friendly.