A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.
Amanda: Hi, friends. I’m Amanda Neely, and welcome to our Grandma's Wealth Wisdom, where we help you break through to a smart, stable financial future, with the tried and true wisdom Grandma used.
Brandon: And I’m Brandon and we are finally back from our summer of interviews and into our school year of educational content. We want to educate you and help you break through to a smart, stable financial future, and we're starting to call it “school year” because we have officially sent our first child to school, right? He's in preschool, which is amazing. I don't hear running downstairs like crazy or screaming or whatever. Someone else is doing that and he gets all kinds of fun stories that he's telling us. [01:08.5]
Amanda: Yeah, and learning how to take a nap at school. A quick programming note, though. We are doing some really amazing interviews still over on our YouTube channel. You can just look up Grandma's Wealth Wisdom on YouTube. You'll find it there.
If you really like podcasts and you want to listen to audio versions of those interviews, we're going to be publishing them over on our sister podcast called FIFE, F-I-F-E for Financially Independent Female Entrepreneurs. We’ve got some really awesome interviews that we've done recently with some females who are thinking very entrepreneurially about life and money. Be sure to go on your podcast app that you're listening to right now and look up FIFE, F-I-F-E, and check out those interviews.
Brandon: And guys can listen to it, too, of course.
Amanda: For sure.
Brandon: It's really good stuff. I’m just not as involved in that side because …
Amanda: We’ve got work to do. [02:00.6]
Brandon: Yeah, yeah. Anyway, check that episode out and, of course, while you're there, write a review for it.
For now, let's jump into today's show. We're at Episode 89 already, which we titled “Velocity Banking: An Honest Review.” There has been a lot of buzz recently regarding velocity banking because interest rates are so low and proponents are doing a really great job marketing and sharing about it on the interwebs. Again, look up velocity banking. I’m sure you'll see a lot of things and we've been getting a lot of questions, so we thought we'd do a comprehensive review, a two-part review, to help you decide if velocity banking is right for you, and if so, what are the pitfalls that you should avoid?
So, first thing, if you don't know what it is, Amanda, what is velocity banking? It sounds really cool. [02:57.5]
Amanda: Yeah, and what an awesome name, some clever people that came up with that. At its essence, velocity banking is built on the difference between how a lender, someone that's letting you borrow money, how they calculate interest on a mortgage versus a line of credit or a home equity line of credit. We're just going to call it HELOC because that's a little easier to say than line of credit.
To break it down for you, mortgage interest uses a standard amortization formula and it's somewhat complicated, but the gist of it is that it takes into account your principal, your interest rate, and your number of payments on a monthly basis. Even if you make your payments more than once a month, your interest is calculated on a monthly basis. No matter if you pay on the first day of the billing cycle or the last, your interest will be the same.
Usually, the interest is set at the beginning. If you make the same payments throughout, whether you pay them at the beginning of the month, at the end of the month, they're going to pay the same interest. It's only if you pay above that that you see the interest change. [03:58.7]
Now, in HELOC, the interest is calculated daily. A lower balance lowers the interest you pay the very next day when the interest is then calculated on that daily basis, so with a HELOC, if you pay on the first day of the billing cycle, you see a difference in the amount of interest you pay versus paying on the last day of the billing cycle.
Brandon: When you understand this, you can use the HELOC to your advantage by paying early and seeing the interest go down accordingly. I mean, it's awesome. Typically, what people do is put their entire income into the HELOC. I said that, yes, their entire income into the HELOC. They charge all their expenses to credit cards and then pay off the credit card from the HELOC. The interest charged will be lower between when the income pays down the HELOC and when the credit card is paid, bringing the HELOC balance up again. [05:00.0]
Amanda: Yeah, so the difference there, let's say you get paid twice a month, every other week, that that lowers your HELOC balance each time you get paid, and then the credit cards, you charge all your expenses to that. You have to pay your credit card bill on time every month to avoid interest, and so all of your expenses hit your HELOC when you actually pay that credit card. As your balance is lower in between those credit card payments, you see that you pay less interest over time.
Let's look at some actual numbers, so you can see how this works. For these numbers, I’m using a $500,000 home, and if we look at a conventional mortgage where you've put 20% down to avoid the PMI, you've taken a 30-year term and it's at a 4% fixed rate throughout.
Brandon: They sound pretty smart already.
Amanda: Yeah. On that $500,000 home, the interest paid to it is $287,000 and some change, almost 280,500, and it takes 30 years to pay it off with very consistent payments of about $1,900 a month, every single month for 30 years, and that gets pretty big. [06:09.0]
Now on the flip side, if you use a HELOC and you're following the velocity banking to a T, let's say you got the exact same mortgage or the exact same balance, 500,000. You've put 20% down. It's only 80% of your home value. But instead of just paying the 1,900 per month, you're doubling it and you're paying extra—or not doubling. You're paying about 20% extra because you're putting half of your paycheck toward expenses and the other half is just paying down your HELOC.
What we’ve found when we ran the numbers there is that you end up paying off the HELOC in 18 years, 12 years earlier than if you use the mortgage, and you save a whole lot of interest. You can even cut your interest in half using the HELOC this way. It’s really awesome to do this and it works really well. [07:05.8]
As long as you're putting in that whole paycheck, you're keeping your expenses low, maybe even to 50% of your income can really help you get mortgage-free really a lot faster. We'll put some of those numbers in the show notes if you want to see what it looks like there.
Now, the numbers only tell one part of the story. There's also the emotional side and some of the “what if” scenarios. I wanted to go through some dangers as well as some other pros besides just saving interest.
Brandon: Yeah, so there are several dangers and what you want to kind of think through if you go into this kind of strategy. One of the dangers, and then there are five of them, is what if there's a loss of income, like you've lost your job? I mean, that can happen. What if you lost your job?
Amanda: Yeah, or even and I’ve seen this happen for one guy, he was using velocity banking. It was working really well because he was getting regular bonuses, and every time he got a bonus, that would bring his HELOC down. It would save him a lot of interest, so it was really great. [08:10.7]
But then his company changed policies and his bonus just went away, poof, right? All of a sudden, you're not getting any bonuses anymore, and this was well before the pandemic, nothing pandemic-related. It was just a change in company policy. Not only did his financial system implode and he was, all of a sudden, struggling to see the HELOC balance go down because he was spending a hundred percent of his income other than the bonuses. His financial system just totally imploded and the financial stress that he and his family were under, ended up ending his marriage, very serious.
Brandon: Yeah, and he was doing a lot of things right, right? At least it seemed, and it just didn't work. [08:58.6]
The other one, number two is what if there's an increase in expenses? I mean, think about that right now. “Inflation” is a word that's thrown around a lot right now. This is a very real possibility. If you've been to the grocery store lately, you might know what I’m talking about here, or if you tried to buy wood for a deck or anything, everybody's just saying, Oh, prices went up. For both of these, it requires a lot of discipline to keep your income up and your expenses low. I mean, you have to watch your numbers closely and be very systematic. That's one of the things that is outside of our control. We can't control the cost of goods.
Amanda: Yeah, I was going to say that, Brandon. The idea that you always have complete control of your income isn't always real. The idea that you'll always have complete control of your expenses isn’t always real. Your property taxes could go up, right, and you might not want to move, all of a sudden, just because your property taxes went up by a few hundred dollars or something like that. [10:03.7]
There are a lot of variables that could change and might make the velocity banking system that you've been using stop working or work a lot less efficiently. Number three, number four, I think are also very important to talk about and they're related. Yep.
Brandon: Yeah, so what if the property values go down? Property values are not guaranteed to always go up. We've seen that in the past and we might see that again. I mean, it's been going up a lot lately, but is that always going to be the case? I mean, there's a real possibility of ending up under water on the property, and so you want to really think strategically of the “what if” scenarios or the worst-case scenario.
Amanda: Yeah, and when you're underwater and your HELOC balance is greater than your property balance is when the bank goes to the fine print. [11:00.0]
Grandma always said, “Eat your vegetables. Look both ways before crossing the road, and never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice, and although some of her wisdom seems to have skipped a generation, you don't have to be left behind.
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Brandon: You want to read the fine print. You'll likely find that your lender can, and this is danger No. 04, they can freeze, reduce, or shut down your line of credit. They can do that. It's in the print there. [11:52.8]
Amanda: Yeah, and I literally saw this happen to a couple of people when the pandemic started. Banks are a little nervous, not really knowing what was going to happen, and then this one couple in particular, I remember their line of credit was just frozen to their current balance. I don't remember exactly what their balance was, but let's say, it was 100,000 that their balance was. They couldn't draw anything new from their lines of credit. It used to be 150, and now, all of a sudden, it's just 100 because that's what their balance was. They couldn't go back up to 150.
But theoretically they could pay some off, right? The next time their whole paycheck went into the line of credit. Maybe that's $6,000. It would bring it down to 94,000, but they were in danger then that the bank would just reduce their line again. You can imagine if you put in that 6,000, your whole paycheck into the HELOC, and then the bank lowers it to that amount, how are you going to pay your credit card bill when it comes to the next time?
These are people that have been using this bank for years. They were loyal customers. They had been paying down their debt. They used the bank for all kinds of things, and yet the bank still did this to them, because guess what? They can.
Brandon: This wasn't way back in 2008, was it? It was … [13:02.0]
Amanda: 2020.
Brandon: Yeah, this is, again, we might say that in 2008 this happened and we think it's not going to happen again. This happened in 2020. Also remember, HELOCs usually have a lower introductory interest rate, but then the rate can go up after the intro period is done. You want to look again at the fine print. What is the interest rate?
Amanda: Yeah, and think, when the interest rate goes up, is my velocity banking strategy still going to work and is it still going to be better than a fixed rate on a 30-year mortgage?
Brandon: Yeah. Pros, there are pros to it, and we've got three of them for you today. Number one, any increase in income automatically pays down the HELOC even faster. If you're an entrepreneur and your income is growing, or you get a raise or bonus or things like that, it can go to make the strategy work even better. [14:06.3]
Then, of course, on the other side, any decrease in expenses automatically pays down the HELOC faster as well, so then we're able to maybe hit it from both ends.
Number three, you don't have to think about it much once you get the system up and running. I mean, again, you do have to get the system up and running, know your numbers, know your mortgage, calculate all that out. But once it's going, assuming nothing changes there, you don't have to do a lot except make sure you pay on time, which is like, whatever that day is, you’ve got to make sure you're not a day late.
Amanda: Yeah, and so what people often do, and this is a big pro, is that they can just automate everything, right? They can have their paycheck automatically, without them even thinking, pay down their HELOC. They can have their credit card set to autopay the day it's due, the full balance that's due, so they never get charged any interest. [15:01.3]
Then they just kind of focus on, Where can I make more money? Where can I decrease my expenses and make things more efficient? That's kind of the beautiful thing about velocity banking, which is that it can be pretty much fully automated.
Now, we want to wrap up with some ideas about how velocity banking and Grandma's strategy could work together. I’ve got a couple of scenarios for you, and then we're going to really dig into this in our Part 2 episode about velocity banking.
Brandon: Amanda, do you think velocity banking does work well with Grandma's strategy or the infinite banking strategy?
Amanda: Yeah, so I'll give you an example of when it might not work well, and then an example when it could work well. A recent scenario is someone asked me, they were planning to use a line of credit to add solar panels to their home and they asked, “Should we take the full amount of the line of credit, add it to our high-cash value, dividend-paying whole life insurance policies, and then take out what we need to do the solar panels as a policy loan?” [16:01.0]
Now, this was a couple who didn't yet have whole life policies set up, so this was one of the strategies they had to fund it initially, but I explained to them some of the dangers of this strategy. They'd be paying interest on the line of credit and on a policy loan. It's a kind of double interest and, yes, the dividends on the policy might make up for it over the long-term, but this couple was a little older, so they didn't have as much of the long-term, right? They were approaching retirement age in their late-fifties, so 30 years from them looks very different than 30 years for a 30-year-old. Then, sincere they were about to approach retirement, they had very little chance for increases in income or reduction in expenses.
They ultimately decided the risks weren't worth it. Had they been younger, had they been using the funds for different purposes, had other variables been different, it might have been worth it to explore, which leads me to an example where someone did decide that they were going to use some velocity banking along with Grandma's strategy. [17:03.7]
Brandon: Can I stop you there? One of the reasons I think using some of the whole life side is really important isn't so much about the banking system or in general. It's the protection of them as a family. That’s the whole reason we have life insurance. It's what happens in 30 to 40 years to that couple, I don't know, not necessarily, How can I save interests and everything else?
Amanda: Right, it's not about the rate of return, yeah. This other example, they were going to use a line of credit to replace their mortgage and be able to do some real estate investing. The whole idea of it is to pay down the mortgage faster, use the line of credit as it's freed up to purchase rental properties, which is hopefully cash flow and repay the line of credit.
Now, this seems a little less risky, particularly because they had a proven track record with real estate. They had a plan for how they were going to increase their income by doing these rental properties. My biggest encouragement to them was to consider contingency funds. [18:03.8]
They had some cash sitting in a bank account that they were thinking about putting into a whole life insurance policy, and then they were wondering, Should we take that cash out and pay down our HELOC, right, or should we leave it there and just work the HELOC system on the side?
I loved that they were thinking this way because the cash value that built up in their policy could be those contingency funds in case there were vacancies or emergency repairs that they needed to make, and/or if the bank froze their line of credit or property taxes went up, or so on and so forth, a lot of these dangers we talked about. The contingency funds within their policy, they could even use in a pinch to pay down their HELOC or pay for their expenses if they didn't have the HELOC to rely on.
One of the biggest dangers that I shared with them is over utilizing that line of credit, using the full amount all the time, or just not having any contingency funds or having those funds just hanging out in a savings account, earning next to nothing, right? [19:06.4]
The ability to use the high-cash value, dividend-paying whole life insurance Grandma's strategy as a place to store their contingency funds seemed really great in the short term, and then what if over the long term, they did allow that cash value to build up and they started putting some of those increases and income into their policy, and then they were able to pay off their line of credit all at once in a big chunk and start using their policy as their line of credit, meaning they never had to pay interest to banks ever again. That's really ultimately what this real estate investor could do over the long term using both systems together and it's looking to be a beautiful thing for them.
Brandon: There are definitely more scenarios that we could run, but we want to keep these episodes short for you and we're out of time actually for today. [20:00.2]
The bottom line with this is velocity banking is doable, right? That it's maybe a good thing. But what you want to do is do your homework just like with anything else. When we talk to people about doing a policy or 401(k)s, now all of that stuff, do your homework, run the numbers, think through the risks you're actually taking, and be sure to have an ally to help you think through and be there as a sounding board and maybe a second brain to consider things you wouldn't think to consider. Remember, we're always thinking about all the great things, the powerful what ifs, but there's always things that happen, right? And so we want to look at both the pros and the cons.
Amanda: Yeah, opportunities to take advantage of and dangerous to avoid, for sure—and if you're looking for an ally that can help you on your journey, decide what's right for you, we'd love to help you as unbiased as we can be. Is velocity banking right for you? Is Grandma's strategy right for you? Should you do both? Should you do neither? [21:07.0]
Reach out to us at Grandma'sWealthWisdom.com, click Request A Meeting, and you can schedule a quick 15-minute call there, and we'd love to help you think through, answer any questions you have, hear a little bit of your story, and give you some questions to consider.
Brandon: Now, be sure to subscribe, write a review, do all that fun stuff. Tell your friends how awesome Grandma's Wealth Wisdom podcast is and remember to join us next time for the second part of velocity banking. How does it play out in the long term? We've been talking a lot about the short term, really building that up short term and saving interest there, but how does it look after 30 or 40 here. Sure, you could pay off your mortgage, but does it actually make a difference in 40 years? Might there be something you're missing by focusing on the short term and forgetting the long term? [22:03.5]
Amanda: A long long term even. Until next time, keep building your wealth simply and sustainably, so you can break through to a smart, stable financial future.
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.
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