In today’s episode, we explain Velocity Banking, aka Dynamic Banking. What it is, why it works, and how it works to eliminate debt fast.
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Thanks for watching!
Welcome to Oregon Cash Flow Pro. My name is James Barber, and I’m here to help you maximize your cash flow!
One of the ways that we do that is with Dynamic Banking, also known as velocity banking.
What Dynamic Banking is, at its essence, is what we call offset accounting. It’s a way of using our income or what we have in our savings or our checking accounts, to offset interest charges that we’re paying on a loan somewhere.
And this method is used all over the world to help reduce your debt quickly, because it reduces your interest charges that you pay.
Now, here in the United States, it’s not the easiest thing to do because it doesn’t automatically happen like it does in some other countries, like Australia. So what happens in some of these other countries is, money that you have in your bank account, in your savings and in your checking account, the bank automatically applies whatever funds you have in there against what you owe the bank. So, it offsets the loan amount that you have out with that bank for that day and it reduces your interest charges for that day.
Here in the United States, that isn’t really a thing. It’s not offered. So, we’ve had to come up with workarounds. And this is where we came up with Dynamic Banking or velocity banking. You’ll see it referred to on my channel as Dynamic Banking. And what it does is we use lines of credit. Either a credit card, a personal line of credit, or a home equity line of credit. Those are three of the main ways that we utilize dynamic banking here in the United States. And the main reason we use those methods is because in order for us to do Dynamic Banking, or velocity banking, here in America, you have to have the ability to put money into and take money out of whatever debt instrument you’re using, so that it functions similarly to a savings or a checking account, like what they use in other countries.
It’s in that ability to put money in and take money out that we’re able to commit more of our resources each month. Because it’s really hard if you’re just throwing every extra dollar that you have at an amortized loan that you don’t have access to it once you use that money to pay down that loan.
So, consider your basic 30 year fixed mortgage. If your mortgage payment is $1,100 a month, and you put an extra $900 a month into that mortgage, rather than say putting it into an emergency fund, or rather than putting it into an investment account… if you just throw all that extra money into your mortgage, a year from now your payment on that mortgage is still going to be $1,100. So, if you come up with an emergency situation, you don’t have access to that extra money that you put in there above and beyond what your normal payment was.
This is problematic for all sorts of reasons. In order for you to access that extra money you put towards it, you’re going to have to get approval from a bank. You might have to refinance your mortgage completely and pay thousands of dollars to do that. You might need to get a line of credit at that point, in order to access your equity. The problem is, you’re in an emergency situation. You might need that money fast and that emergency situation may affect the ability of you being able to borrow money, for you being able to qualify for borrowing money.
So, it’s definitely problematic if we try and access those funds that we just throw extra in at an amortized loan. The alternative is Dynamic Banking. Where we use a line of credit, something where we can put our whole paychecks into. We do what’s called paycheck parking. We put our whole paycheck into the line of credit and then we pull it out to make our bill payments. But, while that money is sitting in there, it’s offsetting the interest charges.
It lowers the average daily balance and that, in turn, lowers the amount of interest that you are going to pay on that loan at the end of that month.
Now, if you want to see how this works, I did a video on it. You can see that right here and in that video I put all of these numbers on a graph form, so you can see exactly how it works when you do paycheck parking and how it offsets the interest charges for the month. None of this is a miracle way to get rich. It’s not a miracle way to get out of debt, but each month all of those interest charges that you offset add up and it can create tremendous savings with what you end up paying in interest on a particular loan.
So, we’ve seen how using this method, you can take a 30 year mortgage and pay it off in 5-7 years. Clearly that’s going to depend on how much extra cash flow you have in your budget. Like I said, this does not happen by magic. You actually have to put the money in there in order to pay the loan down, but you end up with a lot more that you put in there when you’re not giving it away in interest charges.
So, check out that video and you can see how it works. You can also see specific examples that I’ve made. I will do a couple of those videos, one right here, and I’ll do another one here in a few seconds, but I did a couple of examples where I went through an entire budget and I showed exactly how many years it takes to pay it down, with how much cash flow they had and what we were paying off. Whether it’s cars and homes and all that.
Check out those examples. I think if it hasn’t already clicked with you in how much value doing this type of banking can provide, it just might after you watch those videos. So, check those out, I hope that helps.
If you have any questions, leave them in the comment section below. Here’s a couple more examples that you can check out some Dynamic Banking.
And if you found value in today’s video, be sure to hit the like button and subscribe to the channel and continue following along as we go through this financial journey together.