In this episode, your humble Cash Flow Consultant goes through a case study in Dynamic Banking. Let me know if you have any questions.
Good morning folks,
Welcome to Oregon Cash Flow Pro, I am your cash flow consultant, James Barber, and I’m here to help you take control of your finances!
For today, we are going to do a deeper dive into a case study with Dynamic Banking, utilizing a home equity line of credit to really attack this debt and make the most out of our cash flow.
Let’s jump right into this here.
You can see here, we’ve got $5k income, $4k month expenses. We’ve got $340k in debt and cash flow is $1,000 a month.
We’ve got a credit card at 18%, $140 a month. We call this credit card 2. Credit card 1 $5000 balance, $75 a month payment, 14% interest. We’ve got an auto loan, $360 a month, $28k, 4% interest.
And we’ve got a mortgage, again 4% interest, $300k balance, $1432 a month.
We’re going to be utilizing a line of credit that has a $15k available balance, and the interest rate is 6.25%. I’m going to talk to you just for a minute about what’s going on here and what we’re planning to do.
So, with dynamic banking, utilizing this line of credit, what we’re gonna do is we’re going to put a big chunk of the line of credit at the credit cards to begin with, so that we can free up that cash flow and stop paying that really high interest rate, ok?
Yesterday’s video we talked about how utilizing dynamic banking, by depositing your paycheck right into the line of credit, brings our average daily balance down by quite a bit.
You can see that here, the bottom of the screen. And I’ll just briefly touch on this again. If you want to see a little more in depth, you can go back to yesterday’s video, called Beat the Bank.
We got $7k balance to start out with. Our payday comes in, it goes down $5k. Halfway through the month we pay our mortgage, and then at the end of the month we pay off the credit card that we’ve been using to live on, because we can use that interest free throughout the month.
That ends up bringing down the daily balance. In this case, our interest for the month, because this new daily balance ended up, it will end up being between $11-$37. $37 is the high. In this case, our average daily balance was around $3,700 a month and our interest charge was about $20 for the month.
So, we save on interest just by doing this, but with the whole strategy of dynamic banking, we end up saving a boatload of interest on everything, and we pay it off really early.
Jumping into this. Here’s, uh, you can see my note up here. Credit card, we want to pay it off each month, whatever the billing cycle is, so that we don’t end up paying any interest. We use it for all expenses possible and earn points if you can.Those are free points if you pay it off each month. So try and use a rewards card, get the best rewards you can, for however you think you’re going to use it. Cash back is always good because you can put that right at the debt you got.
To begin with, we’ve got the $7k balance and we’ve got this $5k balance, credit cards 1 & 2. So, we want to pay those off right away, because these are really high interest rates. Especially compared to the line of credit.
Now, when I’m trying to decide, now when I’m trying to decide which order we’re going to pay things off, we always want to look at the high interest first, but we’re also going to compare how do these interest rates compare to the line of credit.
If the interest rate is a lot higher then we are ok to take a big chunk of the line of credit, as long as we leave some space available for emergency funding.
So, we’re never going to use the whole line of credit. We want to be a little bit conservative when we take our chunk, but, if we’re attacking a high debt, a high interest debt like this, with a low interest line of credit, like this, we’re going to knock that out the first month.
So, what you see here, we ended up doing $12k. We did $12k the first month. Chunk to credit card 1 and credit card 2, which frees up $215 cash flow each month.
So, our cash flow goes from $1k a month to $1215, and we’re going to see how that gets impacted here.
We’ve got our totals. We pay this, our balance goes down. If we utilize the line of credit like this, where we deposit our paycheck in, pay our bills throughout the month. We end up with $1215 less at the end of each month, ok?
So, we go through month 2, we’re down to $9570. Month 3 balance drops to $8355. Month 4 we’re at $7140. Month 5 $5925. And month 6 $4710.
Ok, so six months, we’ve brought the balance on the line of credit down below our monthly income. Now, we want, in order to maximize the use of this line of credit, we want to be able to put all of our income into the line of credit each month.
So, what I set this up as, is any time this balance drops below $5,000… Any time this balance drops below $5,000, we’re going to throw another chunk at a larger debt.
Now, one of the things you’re going to notice is, now that we’ve got those credit cards paid off, we’ve got this next chunk coming in. We’re now shifting from attacking high interest debt to lower interest debt. Lower than what the line of credit is.So, we’re going to change our strategy a little bit.
And, what I mean by we’re changing our strategy is, we no longer want to take huge chunks, we want to take smaller chunks. So, the line of credit is optimized if we’re paying a lower interest rate than we are if we’re using the mortgage, ok?
So, we need to keep this balance as low as possible, preferably as close to zero as possible. Because we’re paying a little bit higher interest than we are on the auto loan and the mortgage.
To do that, our chunks are going to be $4000, ok? We’re going to do $4,000 chunks. Any time this drops below $5k for the month, we’re going to throw a chunk at that.
So, month 7, is our first chunk.We got $4k to throw at the car. Minus our $1215, brings us to $7495 and now because I don’t have any more room on my board, we’re going to fast forward.
It takes us 24 months, month 24, this $4,000 chunk pays off the car, pays off the car, which was originally on a 45 month loan schedule, and it puts some toward the mortgage.
We end up with a cash flow increase of +$360 and now each month we’re putting $1575 extra, approximately, towards our home loan.
We just keep going with it. Every time the balance drops below $5,000, throw another chunk at it. So now we’re attacking the mortgage.
Here’s where that takes us. Ok? Here’s the result of all this beauty, this effort we put in. We went with our line of credit, by being able to knock out these credit cards in the first month. We said we’re going to pay off in 1 month, total interest paid on the credit card #2 was $105. That saved us almost $700, almost $700, based on our original pay back schedule. If we were just going to pay minimum payments to pay these things off, ok?
Credit card #2, er, credit card #1 $58.33 total interest paid on that. That one we saved $900, just over $975, we paid it off in month 1.
Our car loan, by paying it off at month 24, we ended up paying $1318.65 in interest. Which saved us $1386 in interest.
And, our mortgage, we end up at $83,677 in interest and it took us 11.75 years to pay that off. 141 months. This was a 30 year mortgage and we ended up saving on interest, just on the mortgage, $131,929.70!
So, at the end of all of this, the interest that we saved was about $133k in interest. The interest we paid is about $84k almost $85k, little bit less than $85k in interest.
Powerful stuff here!
Now, what about the interest on the line of credit? Well, right here. 141 months worth of interest, at most, it will have cost you about $5-6k in interest. So, we saved $133k in interest and it only cost us an extra $5-6k in interest, at the most.
Now, if you’re actually extending this out quite a bit, if you’re getting those payments stretched out and bringing that average daily balance as low as possible, this number could be well below $5k. Probably, I don’t know, around $4k, if you’re really running at a good speed, keeping these balances down.
This is why I’m excited. I think, hopefully you can see the potential in this for your particular financial situation. This puts you in control. When you pay off these debts, you’re in control. You can start diverting this money to whatever is going to work best for you. You can invest it in real estate. You can invest it in life insurance. You can really start to put your money to work for you and not just be trying to beat the bank. Which is where we’re starting off here.
Just a quick refresher on dynamic banking for you folks. We’ve got our paycheck that comes in. Goes right into the line of credit. Chunk goes out to pay debts. From the line of credit we pay our bills, we pay our credit cards. And during the month we use our credit card to pay as many bills as we can, and that’s how we’re optimizing the line of credit and bringing that average daily balance down.
Thank you for joining me today. I know that was a lot of numbers thrown at you, but you can see that this works. It’s simple math. So be sure to leave any questions or comments in the section below. Be sure to like the video and subscribe, so you can follow along. And if you have a financial situation you’d like me to show you a plan for how to use dynamic banking for your debts, or for your wealth accumulation, fill out the form below.
I’m happy to help you out. That’s what we’re here for. Take care. Have a good day!
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