Open Platform Monetization - Leveraging Other People's Money to Supercharge Tax-Free Growth
To understand how you can use the power of leveraging, let’s first take a look at how bank’s use it. Leveraging is the foundation of how bank’s make money. And to understand that, you have to first understand fractional reserve banking.
The lifeline of banks is new deposits. Every time you stick money in a checking or savings account, that represents new loans banks can make and charge interest on.
Let’s suppose that you deposit $100 into a savings account.
The Federal reserve says the bank has to keep 10% of that on reserve, and can use 90% of it towards loans.
Now the bank has $10 of your $100 it keeps in its vaults, and it takes $90 and bundles it with 90% of other people’s deposits to extend a loan. If someone else comes to the bank and wants $100,000 to purchase a house, the bank is going to measure the would-be borrower’s creditworthiness, assess the overall risk, mitigate that risk by requiring a lien, and assigning an interest rate (if they choose to move forward). When that loan is funded, the bank sends $100,000, which includes $90 of your deposit, to the seller’s bank. Now $90 of your money is included on the seller’s balance sheet.
That bank can now take your $90, place $9 of it (10%) on reserve, and loan out the other $81 (90%). It can bundle that with a car loan, for example. When that loan goes through, the money goes into the bank account of the seller of the car. And that bank can now loan out $72.90 (90%) after keeping $8.10 (10%) on reserve.
Under the rules of the Federal Reserve, your same money can be loaned out up to 10 different times. When we run that out ten times, we can see what impact your $100 has on the stream of money in commerce, how you benefit, and how the bank’s benefit. For our purposes, we are going to assume the bank is charging 9.41% on the loans (the national average),[1] and paying 0.1% interest to the accountholder (which is what the four biggest banks are paying).[2]
As you can see from the chart, when you place $100 into a bank, after using that money ten times, the total shown in all bank accounts can rise to $651.32, even though banks have only kept $65.13 on reserve. The other $586.19 has been lent, and at 9.41%, the banks earn $55.16 in one year. It costs them $0.65 for the privilege of using your money.
Think about that. The banks have earned $55.16 on $100 of someone else’s money. That’s an infinite rate of return because the banks aren’t using any of their own money. And they only had to pay $0.65!
The problem banks run into is that at any given time, they have far less in their vault than they have on account. Which means if all the accountholders asked for their money at the same time, the banks would fail.
But what if you could become the bank and leverage growth on other people’s money without overextending yourself? That’s what OPM is.
Here’s how it works.
The big difference between what we’re doing and what the banks do is that you’re going to start with your own money. The bank starts with someone else’s money. But because you start with your money, you are never going to be overleveraged. At any time, if you wanted, you could walk away and always have enough money in the vault to pay back the accountholder (the bank) and still have money left over.
So let’s assume you have $100,000. You create an insurance contract, that is designed to have $100,000 in premium go in every year. You take your $100,000 and pay the first two years’ premium.
Now you have an active insurance contract with a large death benefit, living benefits, and liquid cash. Nearing the end of the second year, you’ve got a $100,000 premium that’s about to come due, so you go to the bank (we’ll go to the bank for you—you just have to sign the paperwork).
As you know, banks are in the business of making loans. They assess and mitigate risk and assign an interest rate based on the risk. You’re going to go with them and offer your $100,000 cash-value policy as collateral for a $100,000 loan. That’s what’s called cash-equivalent collateral, which is about as safe of a loan as you can get. So you’re going to get a very competitive (i.e. low) interest rate.
With that $100,000 loan from the bank, you are going to pay your third year’s premium. And the moment you do, you’re once again ahead by $100,000. Then, nearing the end of year three, you’re going to go to the bank again. You’ve got $300,000 in your account, $100,000 of which is already pledged as collateral, and $200,000 of which is not. You are going to pledge the last $100,000 and get another loan for $100,000, which you are going to use to pay the fourth year’s premium.
You do this over and over and over again.
In year 20, you have now contributed $2,000,000 to the insurance contract. $200,000 was yours, and the other $1,800,000 was the bank’s. So you’ve got $2,000,000 earning in your favor, and $1,800,000 earning interest against you. Suppose you are earning 5% on the whole and your loan is earning interest at 3%. That means your balance, just on the principal, increases by $100,000, while the loan increases by $54,000. That is a net increase of $46,000, which is a 46% return on your investment ($100,000) in one year alone.
But that’s not all. That $2,000,000 is just your principal. There is also 20 years’ of growth behind you. Which means you’re probably north of $3,000,000 total. In that case, you’re actually earning $150,000 against the $54,000 in interest, which is a net gain in one year alone of $116,000, a 116% return on investment!
And all that growth is liquid, tax-free, and it continues to compound.
[1] Brianna McGurran, “What’s a Good Personal Loan Interest Rate?” Experian, January 27, 2020, available at https://www.experian.com/blogs/ask-experian/whats-a-good-interest-rate-for-a-personal-loan.
[2] Matthew Goldberg, “Average Savings Interest Rates for 2020,” Bankrate, May 5, 2020, available at https://www.bankrate.com/banking/savings/average-savings-interest-rates.