In today’s episode, we discuss 5 REASONS EVERYONE SHOULD GET A LINE OF CREDIT. A line of credit is such a valuable tool for eliminating debt, as well as being able to access funds, quickly. Find out why else a line of credit makes sense for you.
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Welcome to Oregon Cash Flow Pro. My name is James Barber, and I’m here to help you take control of your finances, maximize your cash flow, and achieve financial freedom.
In today’s episode, we’re going to count down 5 reasons everyone should have a line of credit. So, let’s get into it!
Oregon Cash Flow Pro offers free money management advice to help you take control of your finances. And now here’s your host, personal finance enthusiast and licensed insurance broker, James Barber.
#5, A line of credit provides you emergency access to funds. So, if something happens and you need to quickly get some cash, or you need to have the ability to buy something, that is where your credit cards or your personal line of credit, or your home equity line of credit, those things can come in quite handy.
Regardless of whether you have an emergency fund, lines of credit serve this purpose very well. Because these funds are typically available at your fingertips. Whether it’s the ability to use a credit card or to transfer money from a line of credit or to write a check from the line of credit. Now, maybe you’re thinking, well that’s what my emergency fund is for. All of these financial gurus tell me that I should have 6 months set aside in a savings account or something that’s liquid like that, in order to have access to 6 months of emergency funds.
And, while that’s sound, safe advice, it basically ties up your money into an account that doesn’t do much for you. Your money doesn’t earn much interest and it doesn’t do a whole host of other things that it could be doing in our pursuit of maximizing our cash flow and trying to achieve financial freedom.
Which brings us to #4 in our countdown, which is, these lines of credit allow you to eliminate idle money. Idle money is money that’s sitting in a checking account or a savings account and it’s not earning you any interest or very minimal interest. It’s doing one job for you, and that is to be there in the case of an emergency. Now, consider this, if we have credit cards which we can access and pay 0% interest for thirty days while we use them, or if we have a line of credit that we can access, you no longer have to sit there month after month, or year after year, with thousands of dollars, even tens of thousands of dollars, sitting in a non-interest bearing account, or a low interest bearing account. You can move those to somewhere that is a little more beneficial to you, knowing that over the long haul, because you’re not going to tap that emergency money very often, but when you do, if you reach into your line of credit, or you use a credit card, that gives you a certain number of days for a very small cost, that you can borrow money. And it will give you the opportunity to either, take care of the emergency and pay it back, or access the other place where you can store these funds, which is doing a lot more work for you. And these funds are providing a lot more than just sitting there idle.
As an example , let’s say that you have a standard emergency fund of $50k, and you have $50k in the stock market. The alternative to that is putting $95k into the stock market and keeping $5k in your emergency fund. Now, what happens if you have an emergency? Well, if you have to actually sell that stock, you’re not going to be in a position to maximize when you sell that stock. You might have to sell it in a down market like we’re in today. But, if you have a line of credit that you can access instead, you can tap that line of credit, pay a little bit of interest to use that line of credit, and pay it back while leaving those funds in the stock market to recover. Or, if the stock market isn’t down, you could always sell those stocks, pull the money out, and pay off your line of credit. And it might have only cost you a few dollars in interest to access that emergency money. In the meantime, you might have gone a year, or two years, or five years, with your money in the stock market, all the while growing. Likewise, you could have that money in another vehicle such as an infinite banking policy, which we talk about quite a bit on this channel.
So, as you can see, having access to lines of credit can allow you to invest that money that would otherwise be sitting idle, into other forms where it can grow and provide more benefit to you. Now, if you’re in a situation where your emergency fund is $1k, you may not want to do this, because that represents quite a bit of risk in relation to the amount of funds that you will have available.
And if that’s your situation, this brings us to #3 in our countdown, which is, lines of credit allow you to maximize your cash flow. And we do that utilizing a process called dynamic banking, which you can check out in my videos here. But essentially, what we do with dynamic banking is we utilize lines of credit to pay down chunks of other loans, and it allows us to pay down other debts very quickly, by doing what we call paycheck parking, and using these lines of credit to offset interest charges with all of our income that flows thru our accounts.
If you want to learn more about that, I highly recommend the videos on dynamic banking.
#2 in our countdown, lines of credit give you the ability to leverage debt to purchase income producing or cash flowing assets. When it comes to debt, we have good debt and we have bad debt. You can see more about good debt and bad debt in this video here. But the optimal use of debt is to use it for leverage, in order to maximize your ability to purchase cash flowing or income producing assets. Now, sometimes that might be with a mortgage, in the case of rental properties. But it could also be lines of credit, using a home equity line of credit in order to flip a property. You can use a home equity line of credit to buy a rental property. You can use a home equity line of credit to start a business, to expand your business.There’s a lot of different things that you can do when you have access to lines of credit. And when you leverage it, you can 10x your returns. And this is especially obvious when we consider real estate.
As an example, if you have $1 million, you could buy 10, $100k rental properties. If you just paid cash for those properties, you might be able to generate $7-10k per month. Alternatively, you could leverage that $1 million and put 25% down on rental properties and end up with 40 properties. You’ll have a mortgage payment, but you’ll still end up with enough cash flow that you might be around $14-20k a month in cash flowing income. That’s the kind of ability that leveraging provides. So, don’t underestimate the ability to use lines of credit to leverage debt, to maximize your cash flow.
And, our #1 reason that everyone should have a line of credit is, access to equity. In most of our assets that we own, as we pay those down or if we just pay cash for them, they have a net worth. They have a value to them. But that value is locked up inside. So there’s typically three things that we can do to access the equity in our assets.
Number 1, we can sell it.
Number 2, we can borrow against it and get a standard loan, where we borrow a set amount and make payments until that’s paid off. At which point, we can then borrow again and access that equity again.
Or 3, we can get lines of credit that allow us to access the credit over and over again, without having to pay it down all at once. And you can do this with all kinds of property. It’s quite typical to see it in homes, with home equity lines of credit, but there’s also personal lines of credit that you can access that might have an underlying security. Meaning that you get a line of credit, but they want something securing that line of credit. That might be some thing like a vehicle. You can find people that will loan you money on all the furnishings and all of the silverware and things in your house. They’ll basically take anything to secure the debt. Because it’s more likely that you’ll repay a debt if there’s something securing it. But those are ways that you can access that equity that you hold in these items without having to sell them.
So that’s the beauty of the lines of credit, because having access to that equity opens up a world of possibilities for what you can do with those funds.
Thanks for watching. Be sure to like this video. Subscribe to the channel, so that we can continue on this financial journey together and if you want to learn more about lines of credit, check out these videos right here. And if you have any questions for me, put them in the comment section below, I look forward to hearing from you.