Yesterday we talked about reserve assets in detail. Today’s topic will be how to strategically warehouse cash.
Let’s start with this – when we talk about cash, we’re talking about fiat currency like US dollars, Euro, yen, and the others.
Obviously it’s a good idea to keep a little bit of cash in the bank at all times. Here in the US, I think it’s wise to have some physical cash on hand as well—just in case we need it in a pinch.
But here’s an important nuance that mainstream finance doesn’t understand…
Holding cash is about pure liquidity… not about stockpiling money. We don’t want to hold the bulk of our money in cash.
That’s why reserve assets are so important. We allocate to gold and Bitcoin specifically to save money.
As I mentioned yesterday, I don’t think we should view gold and Bitcoin as investments that we buy hoping to sell later. Instead, they should be the cornerstone of our asset portfolio.
Gold and Bitcoin are our reserves. We buy them specifically to move out of fiat money and into higher quality assets.
The problem with cash is that it loses purchasing power over time. This is why it’s important to strategically warehouse cash.
Sometimes it loses purchasing power exceptionally fast due to “high inflation”… but it’s still losing value during “normal” times as well. That’s a function of policy.
In the US, the Federal Reserve (the Fed) has a stated policy goal of 2% inflation annually. That means it deliberately wants to cause the US dollar to lose 2% of its purchasing power every year.
Of course, they never say it that way. They pretend that inflation is about rising prices and asset values. But rising prices are just the result of inflation.
Inflation is the act of expanding the money supply. This can be done simply by “printing money” at the central bank. But the current system has a myriad of other more nuanced ways to expand the money supply as well.
The Fed’s open market operations, reverse repo facility, standing repo facility, discount window lending, and its foreign exchange swaps can all be used to inject dollars into the financial system to increase liquidity. Then fractional reserve lending, securitization, and off-balance sheet vehicles at the commercial banks can also increase liquidity in the system, each expanding the money supply.
We should note that all these activities tend to create boom-bust cycles… but that’s a topic for another day. The key point is that cash will constantly lose purchasing power over time for as long as the current monetary system remains in place.
That’s why we don’t stockpile money in cash. It would be like storing water in a bucket riddled with holes. Our purchasing power would gradually leak out on us.
Still, it’s a good idea to keep some cash so that we have liquidity. Here’s what I mean…
If we have an unexpected expense pop up, it’s ideal to have the ability to take care of it without needing to sell or borrow against our other assets.
In just the same way, it’s good to gradually build up the cash balance we need to make larger investments over time. Here I’m thinking about our cash flow investments, which we’ll talk about more in a later entry.
That’s why we still want to hold some cash. But we should be strategic about how we warehouse it… so that we fix the leaks and keep up with inflation.
It was much harder to strategically warehouse cash during the ZIRP (zero interest rate policy) era when the central banks collaborated to keep interest rates at zero. However, we have some options now that rates have normalized. They are:
- Money market accounts
- Short-term US Treasury Bills
- Max-funded life insurance policies
Money market accounts are the most simple and straightforward. These are a type of savings account at the bank that pay interest on deposits while allowing for a limited number of transfers or withdrawals.
This option provides the best liquidity because we can instantly access the cash in our money market accounts if we need to. The trade-off is that these accounts will typically generate the lowest return on our money compared to the other two listed above.
Personally, I like to keep the cash reserves I hold for my rental properties in money market accounts. Right now those accounts are paying between 4% and 4.5% interest annually. Yet they provide me with instant liquidity should something come up with one of my properties.
Short-term US Treasury Bills are also simple and straightforward—after you’ve learned the ropes. These are US government debt securities that mature in one year or less.
Buying a Treasury Bill is effectively lending money to the US government for a designated period of time. We can buy bills maturing in 1 month, 2 months, 3 months, 4 months, 6 months, and 12 months.
Treasury Bills usually pay a higher interest rate as compared to money market accounts. But they don’t provide instant liquidity. We cannot access our money until the debt instrument matures.
Max-funded life insurance policies are more nuanced and less utilized… but they are by far the best option for those with a longer time horizon.
These are life insurance contracts designed to create outsized cash value within the policy over time. And make no mistake about it, these policies are dramatically superior to standard life insurance.
Now, I know there’s sometimes a stigma attached to life insurance. And I realize that it might not be suitable in some cases. Everybody’s situation is different.
But life insurance is a tax-efficient vehicle that will provide us with uninterrupted compounding and complete liquidity. Meaning, we can use our life insurance cash value for other investments and we’ll still generate a return on it inside the policy.
That means we can leverage the same dollars twice. They generate a compounding return inside the max-funded policy. And we can use the cash value to also make investments outside the policy.
That’s why the banks and insurance companies love max-funded life insurance. They use this strategy themselves.
The key here is that we need to structure these policies according to the Infinite Banking Concept (IBC). That typically requires that we work with a specialist who understands the nuances of this strategy.
Simply put, Infinite Banking policies are not traditional life insurance policies. Our goal with them isn’t to buy life insurance. Instead, it’s to strategically warehouse cash in such a way that it will compound annually yet still provide us with complete liquidity.
Typical IBC policies are structured such that only a small percentage of the premium paid supports the base life insurance policy – the death benefit. The remaining portion of the premium accelerates the growth of cash value inside the policy. That’s why I refer to these as max-funded policies.
The result is that we build cash value very quickly. Then we can access that cash value at any time for any reason – without having to sell anything or create a taxable event.
The following example demonstrates how it works:
This is a max-funded policy performance illustration that I pulled from one of my policies. So this is a real-world example with no hypotheticals.
I know there appears to be a lot going on in this graphic, but it’s really quite simple. At the top of the chart we can see three distinct categories.
The first is “Premium Breakdown”, shaded in gray. It shows us the total premium we’ll have to pay each year to keep this contract in force.
The second column is labeled “Guaranteed”. This refers to the policy’s cash value and death benefit. Even if the life insurance company never pays a dividend, we are contractually guaranteed to have the total cash value and death benefit listed in this column by year, as long as we pay the annual policy premium.
The third column is labeled “Non-Guaranteed” and shaded in gray. This column lists the dividends we’ll receive each year if the life insurance continues to pay dividends at its current schedule. They accelerate the growth of both our cash value and a death benefit.
Let’s walk through this real quick…
We can see that the premium for this policy is $4,000 a year for the next 15 years. That’s a total outlay of $60,000.
As long as I pay make this premium payment each year, I’m guaranteed to have $69,312 in cash value after 15 years. That’s a conservative return of 15.5% on my money.
However, if the life insurance company continues to pay dividends at the current schedule, I’ll have $81,559 in cash value after 15 years. That’s a return of 35.9% on my money. And that’s with no market risk—meaning my cash value can’t go down.
So when I make my $4,000 premium payment each year, I don’t see that as an expense. It’s savings. Because my money’s going to grow. It’s like depositing that money into a bank account… except much more strategic.
And don’t get me wrong – I don’t have to wait 15 years to access my money. As we can see in this illustration, my cash value grows every single year. I can use that money for anything I want at any time. There are no restrictions.
Now, look at what happens starting in Year 16. The policy premium drops from $4,000 to $608 a year. That’s because I was paying $3,392 a year for accelerated cash value growth… but I don’t have to do that after 15 years. I can pay the base $608 a year and my cash value will still grow.
So if I were to fund this contract for another 15 years, it would only cost me $9,120 more out of pocket. That’s a total outlay of $69,120 over 30 years.
Yet, I’m guaranteed to have a cash value of $114,222. And if the company continues paying dividends on schedule, my cash value would be $183,108. That means I will have grown my money by at least 65%, and perhaps by as much as 164%.
Again, this is without sacrificing any liquidity. I can access my cash value at any point along the way for any reason.
That’s the power of max-funded life insurance. It’s a great vehicle to strategically warehouse cash. And as a bonus, it also provides life insurance coverage.
As you can see in this example, the death benefit starts at $247,525. Then grows to $617,310 after 15 years and $773,272 after 30 years. That’s a nice little chunk of change for the beneficiary to inherit.
Okay, so I hope you can see why I believe so strongly in max-funded life insurance according to IBC principles. They are a tax-efficient vehicle that enables us to strategically warehouse cash.
And I should add that these policies are completely flexible. I’m demonstrating a policy that starts with a $4,000 annual premium… but there’s nothing magical about that number.
You can set up bigger or smaller policies as you see fit. You can also set up policies where you drop a large chunk of money into them up front, and then pay a smaller annual premium after that.
So the strategy is completely customizable. Feel free to reach out to me if you would like more information on how to get started with it. You can also check out my friends at Remnant Finance for specific guidance and direct support. They are at: https://remnantfinance.com/
-Joe Withrow
P.S. Our Finance for Freedom short course provides a detailed walkthrough on how to build out a robust asset allocation model with specific guidance for how to invest in each asset class. If you’re interested, you can find it at: https://financeforfreedomcourse.com