Nelson's 5 Factors in Today's Dollars (Inflation)

If you understand the truth that your money must reside somewhere and you have the opportunity to build your own warehouse of wealth inside of an entity that has never failed to be profitable since inception and has weathered dozens of recessions, more economic turmoil than the average human being could ever withstand, and yet is profitable year in year out, decade in decade out, century in century out, how much capital do you not want residing there? So, Rich, here's something really, really interesting. So, you know, obviously the inflation, the state of inflation that we're in today, and you had asked me this den of knowledge, and you said, hey, what do you think a half a million dollars would translate into? So if you were to think of a half a million dollars back in the early 1980s, what do you think that would translate to in today's dollars? And I said, well, it's got to be north of 2 million. And you said, oh, yeah, it's 2.6. So if people on the Internet, think about the example that Nelson talked about in his book on page 12, that's a factor of 5.2.

You're almost correct.

Let's just say I actually call it.

800,000, but it's still a really big.

Okay, well, let's just say it's close. Let's just call it a factor of five. Just for simple math.

How coincidental that that's exactly what Nelson used to talk about in all of his presentations about his 5 factor of inflation.

Right? And so if you recall what he described in his book when he said, he talked about, he said, you know what, at the time, early 1980s, he got accustomed to paying 9.5%. He was a half a million dollars in mortgage debt because he was an active real estate investor. So we take $47,500 and multiply that by a factor of five, that's $237,500. In today's money, that's $19,792 a month. Inflation skyrockets. Interest rates peak at 21.5%. If you were prime, now I owe 23%. So now he owes 67,500 more than the 47,500 he grew accustomed to paying. So if you think of it in factor of five, 67,500, multiplied by five, that's another $337,500 or another $28,125 a month just in interest, just in additional interest that he wasn't expecting to pay. Now, do you think that stressed him out just a little?

You might say it would be probably crippling for average human being.

Yeah. And so he goes on to talk about, hey, people were saying, well, Nelson, why don't you just sell the real estate? And he's thinking, what fool would buy the real estate for me knowing that they have to finance it at such a high rate of interest and to.

Pay him the price that he needed to get out of the real estate so that totally pay off the snakes and dragons, you know, the value of the real estate had dropped and he was in development projects. And so when you're doing development projects, it's not like you have necessarily something to sell yet. You're going through the phases and the stages of these long term projects to get something that has an end, end use can be sold. And you know, it's, it's worth a fraction of its value if you're not at certain stages of that development. And then Nelson talked a lot about, and the reason, you know, at the beginning of our call, we talked about, we said 500,000. In the book, Nelson talks about the 500,000 that he owed. But then when he would do his seminars, he would talk about a series of additional events that happened over the preceding 18 months. One of those is that one of the large development projects they had, and he worked with partners and they had a big name lawyer. He was, you know, one of the named partners in the biggest law firm in town in Birmingham, Alabama. And that guy bankrupted on the project. And so Nelson, the remaining partners had to eat his portion. And Nelson's share of the deal that he had to, he had to take on was 300 grand.

Yeah.

And so now he's at $800,000 that he owed at 23% interest. That's in 1981, $1982. CPI inflation calculator. I found one. And, and we plugged in that $800,000 value from a 1980, 2022, and we're looking at $2,606,000. So the equivalent debt amount that he had in, in today's relative dollars based on, based on US dollars would be 2.6 million. So just think if you're listening to this, imagine today that you all of a sudden woke up and you owed $2.6 million at 23% interest.

That would be a really, really bad day for you and a great day for Tylenol. I mean, right now, when you think about the state of affairs, right, we've got increasing inflation, we've got increasing interest rates, we've got political turmoil, very familiar to people who lived through the early 1980s and people were literally walking into their corner bank and putting their house keys on the counter and saying, take the house back. So Nelson's wisdom rings true to this day. And he knew that he had to get rid of the snakes and dragons, as he referred to them as, and he had every option available to him, including filing an assignment in bankruptcy. That is something that he could have chose to do at that time. And he chose not to go down that path. Not only did he get rid of the snakes and dragons in a 13 year window, but he also took care of that attorney's share of the deal that you just described earlier. And he didn't realize that the solution to the problem was right there in front of him. He owed all of this debt at 23% interest and he could borrow from the life insurance companies because he already had accumulated a system of policies up to that point in his life. He just didn't realize that that tool was the solution to his problem. And he could borrow money in the form of policy loans at eight to eight and a half percent. So again, doing some grade three arithmetic, it didn't really take him too long to figure out that he had the solution right there.

The problem was he didn't have enough because he hadn't been putting enough premium in.

Bingo.

So his real epiphanous moment was like, I can get myself out of this meth. The issue is I need to dramatically increase the amount of right. Premium dollars I'm depositing to create the capital necessary to do.

Yeah. The analogy that he used more often, if you put pennies in a jar and you look inside that jar, all that you have access to is pennies. If you put dollars into look inside that jar, all you have access to are dollars. And so when he looked at the size of his insurance program at that time and the money that he was putting in, it would have been easy for people to say to him, well, Nelson, all that you've got is a penny in your deal. So he had to crank up these large policies because he realized, hey, this is a tool that can get me out of this mess and my money has to reside somewhere. So why don't I build my own warehouse of wealth? And while I'm simultaneously getting rid of all the snakes and dragons in my.

Lifetime, I posted in the comments too, another link to this, the same like inflation site. And I just adjusted the numbers and I was thinking about Nelson in his seminar. He would talk a lot about his state farm policy. So he got his state farm policy in 1959. His brother sold it to him and his premium was $398.20 a year. And that was a, that was for a $20,000 starting death benefit, was the original death benefit contract. And I was just thinking, you know, he would talk about how he's putting in, he locked in the strongest dollar, the premium dollar at that time, and he's now paying with weaker dollars on an ongoing basis. So I just kind of plugged that in looking at today's value, his $398 premium from 1959 that he was paying, if he was still paying that premium Today, he would put 398 in and he would have the equivalent of 4052 of today's dollars. One of the other comments that Nelson made at one of the training sessions we were at Jay, is he said he realized at some point in his life that he wasn't being an honest banker. Says, I was being honest. I'm putting in depreciating dollars. I need to increase the amount of dollars I'm putting in anyway, increase the size of my system so that I'm, I'm matching and keeping pace with the $398 I used to be doing. That was one of the commentaries that he would say about being an honest banker, but also just recognizing how his financial energy was more and more efficient because he locked in the strongest dollar when he got the policy.

Yeah, and not to mention when he, he shared the example of when he contacted State Farm and he said, hey, you know these annual dividends that I've been putting back into the policy to purchase more paid up additions, which all of our clients do, thank goodness he reached out to State Farm and he said, I want you to change the dividend election. I want you to start sending me a check and the checks that he was getting. The dividend alone was larger than 10 times his annual premium. So talk about what you just described around the strength of the dollar at the time when he started the policy back in late 1950s. And then you fast forward to 2008, 2009, 2010, 11 and so on. Just the annual dividend alone was more than 10 times the premium that he deposited into the policy. If you were to look at this logically, you go back to this attorney that he was talking about in his joint venture, his real estate deal. Nelson tried to describe the process of becoming your own banker. And the attorney not only didn't implement that in his own life, but he borrowed money from Nelson to finance an airplane and so Nelson said, I used the, the payments that this attorney was making to me every month to go and do the very thing that I was trying to convince the attorney to do for himself. So he took that stream of payments and went and purchased another policy, exactly what he was trying to convince the attorney to do. And from that moment forward, he said, I'm no longer in the convincing business. A person's either going to catch this and realize that Infinite Banking Concepts is the solution to the problem, or I don't have a prospect to work with. I'm not going to try and convince somebody that this is what they should be doing. And that's what led him to that philosophy of Infinite Banking Concepts is more caught than it is taught. And that is just so true. And it rings even truer to this day with the current state of union that we're in, because people are connecting with us every single day at an ever increasing rate. We're saying, we've been stalking you guys on the YouTubes and the Facebooks for months now. And it's like, wow, that's an interesting way to open up a conversation. And then we really believe that this is something that we need to be doing. And we've been looking for this. We just didn't know exactly what it was that we were looking for. But believe me, this strikes us as the right thing for us to start doing. Now that's someone who's caught it.

People would ask them, especially advisors, they'd ask them the question, like, hey, Nelson, how do you strike up the car? How do you get someone interested to learn more about this? And Nelson was like, well, do you ever have the gut feeling there's something fundamentally wrong in the financial world we live in? Yeah, give me, give me 20 bucks. Read this book.

That's exactly how you do. Give me 20 bucks and read this book.

And so, you know, Nelson really believed that, you know, give people an opportunity to come to it at their own schedule, plan to see with them, give them the opportunity, but really ask that question. Do you ever have the gut feeling something's fundamentally wrong in the world that we live in? And if that is true, then are you willing to take a couple hours, maybe whatever, three hours out of your life and learn something about it? And if they say, yeah, I say, great, I got a book for you. I'll send you a copy of the book. Or, hey, give me adjusting for inflation and exchange rate differential. Give me 30 bucks and I'll get a copy of this book in your hands.

Because at a five factor. Just give me 100 bucks and go ahead and read the book, I want to share something with you. And again, it's from page 12 of Nelson's book. And Nelson goes on to say, lastly, it was strongly influenced by my experience in the real estate business, right? And he from the timber industry that he was in. And he said, you know, timber is a form of real estate, right? As well as the land in which it grows. And he talked about how he's been around real estate for all his working life. He developed a strong interest in the subject. And he said, if you read these books on the subject of real estate, the central message is not about real estate at all. It's about the magic of leverage. Essentially they all say, buy some real estate, borrow the money to pay for it. Because you're always dealing with borrowed money. Either borrow money and pay interest or you use your own money and give up the interest that you could have otherwise earned, pay interest for a while and then sell the property. All you have given up is the interest you paid out. Wow, that leverage is wonderful. That's all true as long as things are going the way the financial geniuses describe it. But they never tell you what happens when the lever goes the other way and the lever has gone the other way. And so getting access to capital was ridiculously simple seven months ago. Getting access to capital for high caliber opportunities is, is not so simple today. And the snakes and dragons as Nelson used to refer to them as, they're having the borrower jump through even more lengthy nosy credit applications. All of these hoops that you need to jump through to gain access to someone else's pile of money, and you've got all these people pontificating that infinite banking concepts is such a brilliant thing now. And we didn't hear anything but crickets from those folks seven months ago. Here's the deal. The process of banking never stops. It just keeps going on. No matter what's happening with interest rates, no matter what's happening happening with taxes, no matter what's happening in the real estate cycle, no matter what's happening in the economy, the process of banking continues no matter what. And you and I have been sharing for years talking about, in our 15th year describing this process and saying, listen, this has nothing to do with addressing the yield of an investment. A fatal error in thinking is that infinite banking has something to do with interest rates, which it doesn't. This is all about how you go about financing the things you need in life, which can certainly include real estate. Investing or business equipment or vehicles or property, whatever it is that you need to finance throughout your lifetime. But the fundamental truth is that someone and some organization must have control over a pool of money that must flow at a cost to meet someone else's need that will never stop. And so how much of that function do you want to control as it relates to your needs? Because presently you're advocating 100% of that opportunity and responsibility to someone else and you're enriching someone else. And so when do you want to stop that? Do you want to wait until interest rates peak at 21.5% again? Do you want to wait until tax rates go up to 800%? Stop penalizing yourself and start taking control of this function. Because my goodness, what a peaceful, stress free way of life it is. When you and I first got started in our journey, we weren't dealing with soaring inflation, we weren't dealing with skyrocketing interest rates, we weren't dealing with political turmoil. And you, you have all those ingredients as part of our day to day reality. Now I'm not losing a wink of sleep. Clients are calling me every day going, this is the only asset on my balance sheet that keeps going up. And I heard you saying it, I heard you shouting from the rooftops back in 2010 and 11 and 12, when the world was your oyster and you could borrow money from anybody for practically nothing. And now this is a reality and haven't had a single client, Eric, call us yet, say, gosh, I'm really frustrated that my asset keeps going up in value every day. It's really bothering me and I need some counseling to deal with that because everything else is going up and down, up and down, up and down, up and down. And this thing just keeps going up. What on earth is going on?

I was chatting with a client yesterday who's, who's an engineer. Anyway, I was on this conversation and he was like, he was telling me, yep, that's what I do. It's my routine. I come down, I come down, I get into my home office, I have my coffee, I do this, I log in, I, I check my policy values, I update my tracker, I, I smile ear to ear because my cash went up overnight. And it just really sets my day up. So, you know, he's using the fact that in the knowledge and the verification that his values went up overnight to like, to give him a morning boost. And it's like, wow, that is an interesting thing I've never really heard before. And I really like that. It's like what a way to start your day. And you know, you're talking about, you mentioned, you know, real estate. And again, what, what are the, all the gurus and what they've been saying? Well, Nelson says it right on page 85, which is again one of my favorite pages of the book. And in point number five he says wealth has got to reside somewhere. Where would you prefer to have it reside? Real estate question mark? Well, take a look around and see what happen happens when one needs liquidity. Real estate is very much a frozen asset and he's referencing what you mentioned earlier, that, that point in time where he had a bunch of asset based real estate but he couldn't really get rid of it and the market shift was so dramatic there was nothing he could do to exit. And what comes up for me as I, as I read this and I think about this is, you know, there's a lot of people, I've been talking to people recently in the last couple of months they have pre sale condos, pre construction condos that they've, they've got into deals on mostly in the Toronto market space and you know, they sign contracts to get into these deals six years ago, five years ago, three years ago and a couple of them are coming up for possession. Of course, six, seven months ago they were looking at exiting and having a pretty good multiple of their exit. Now if they're exiting in say February, they're probably still going to be doing pretty good. They're going to walk out profitably but not as profitable. And if they have to close on the deal and they're not able to sell the deal or get, or assign it or get rid of it right away and have to close their entire financial picture on debt servicing has changed. So their ability to even go and get the financing that they would have had no problem doing five years ago, they might not even get it. So now they might be looking at a B lender or a private lender and that'll squeeze or eliminate cash flow and they might be negative cash flow the moment they take possession, which wasn't on their original deal sheet. These are the kind of things that happen and we, I've seen this before, I know you've seen it before and now I'm seeing it like one of your favorite sayings is three times as a revolution. Well, that commentary has happened for me about four times in the last two months with different people. And so I think that the people are being proactive and they're, they're reaching out to someone or a coach and they're trying to figure out what they might be able to do. They're probably going to be okay. And depending on their timing, they'll be okay. But a lot of people who made that deal to sign a pre construction deposit last year or two years ago, they're probably not getting out. They're probably going to end up with a building that doesn't get finished. The developer goes belly up or bankrupt or higher pressure. Yeah. And the end result is there's not going to be any money.

And it's really unfortunate for people who find themselves in that circumstance because there's an absence of control. The question is, how do rising interest rates affect policy loans and performance? Well, look at it from this vantage point. If you think of when we were in record low interest rates, banks were making record profits. Don't you find that phenomenon interesting? It had nothing to do with the rate. It had everything to do with volume. Everything to do with volume. So in a rising interest rate environment, banks make less money because there's not as high a volume of lending. If you look inside what's going on within the life insurance carrier, if you are a co owner of the life insurance company and you're accessing and utilizing the policy loan provision, if the carrier increases the policy loan simple interest rate, is that something that is going to bother you or is that something that you're going to be completely okay with? Remember the grocery store example? You want to put more money into the cash register so that you can buy more cans of peas to sell to more captive customers. And the interest. The insurance companies have to put money to work in a variety of places, one of which primarily is guaranteed fixed income. And so when you have rising think of a teeter totter. You've got rising interest rates on this side and you've got bond prices on this side. Interest rates go up, bond prices go down, interest rates go down, bond prices go up. Insurance companies have a lot of ready access capital to pounce on high caliber opportunities to create more guaranteed fixed income for the benefit of everyone who co owns the company. Here's what we got to do. We have to continue to emphasize with people that you've got to think like an owner. Remember, you're all four characters in the financial play. So when you ask that question, you've got to investigate that. As an owner, how does this affect the performance of my business? Well, I know how it's going to affect the performance of my family banking business. I'm putting more capital into the system Precisely what I should be doing. And I know how it's going to affect the performance of the insurance company that I co own. Ever since they've been tracking this. What is the prevailing rate of interest in the marketplace compared to dividend scale interest rates compared to the performance of the insurance company financially, etc. And this is a good thing for us as co owners of the life insurance company. I know we're not segregating that from the financial difficulty that families are experiencing across the country. We're just speaking the truth. And so you want to be a co owner of this business during high rates, low rates, middle rates, skyrocketing rates. Because the process of banking goes on no matter what. It doesn't matter what's happening with the rate. It's all a function of where your capital is flowing to. So in this environment, make sure there's more capital flowing back to your system. Isn't that good?

Yeah. And I mean to expand on that, you mentioned your lever example with the pen. And as those bond rates go up or what, the insurance company can go and seek opportunity in another marketplace factors. And the insurance company lends money too. They don't just lend it to the policy owners, they lend it out in the marketplace, they lend it as mortgages. And if mortgage rates are going up for regular banks, well if the, if the insurance companies lending money on mortgages, big giant commercial mortgages and residential mortgages, and they've got millions and millions and millions of dollars out there lent in the marketplace, if they come up for renewal, don't they raise the rate too? And isn't that more money that's coming back into the pool? So all those inputs help expand the money pool for the benefit of all the owners. And it has an improvement on the overall surplus. And when there's an improvement on surplus.

They have to distribute that surplus.

The only people they can distribute it to is the participating owners. So as interest rates rise, then the things that the insurance company can do shift and change and they can capitalize on some of that market. And what they do is they smooth, it's called a smoothing effect. They take what's been going on in the last couple of years and the projection of what's happening in the next few years. And they, they try to just make it nice and kind of even keel so there's no jagged ups and down edges so we're not riding the roller coaster that everyone else is. And it allows for a nice clean and consistent solid steady accumulation over time. And that's part of what? It just makes sense. It's. It's basically engineered to be successful.

There isn't a single, not one year that the carriers that we work with haven't produced a divisible surplus. And we're taking, we're taking folks back here all the way to 1847. So that, that's not a little period of time. That's a very long period of time. And so if you understand the truth that your money must reside somewhere and you have the opportunity to build your own warehouse of wealth inside of an entity that has never failed to be profitable since inception and has weathered dozens of recessions, more economic turmoil than the average human being could ever withstand, and yet is profitable year in year out, decade in decade out, century in century out, how much capital do you not want residing there? And that really is, again, it's just a function of logic. Is it logical for me to build my warehouse of wealth there? Absolutely. Am I motivated to do that? Definitely. Do I possess the desire? Yes. Where am I going to find the financial resources to do it? Well, you've already got 100% of your financial resources prioritized and allocated to what you believe is important. So if becoming your own banker becomes important, then you'll begin to allocate financial resources that already exist and just change the process of where the money's going to and who it's being put to work for, regardless of the rate. It's all about where the money's flowing to and who it's being put to work for.