How I Have Used a Heloc and Velocity Banking

Hey, what's up everyone and welcome to the School of Personal Finance. In today's video, we're gonna talk about debt. We're gonna talk about things like velocity banking, how to use debt strategically, does it make sense to actually borrow money to get out of debt, which sounds very counterintuitive. I'm gonna share stories with you of how I've personally used debt in my life strategically, or at least attempted to. I'm gonna talk a little bit about good debt versus bad debt, the risks that are involved in all of these things, and just try to help you with your mindset when thinking about debt, what you should be doing, what debt you need to get out of immediately, and if it's worth it using debt to start to build assets and things like that. So I hope that you find this one helpful. Let's get to it. All right, so just a few quick updates before I get started. The first one is I'm getting closer to launching my monthly membership site, where you get unlimited access to all the courses I create. I just finished filming the first one. It's called Master Your Family's Finances in 30 Days. And then beyond that, I'm also gonna have monthly webinars. I'm gonna have monthly accountability meetings. I'm gonna have office hours where you can come in and ask me questions. I'm gonna have quizzes, printouts, everything to help you become great with money. So this is really gonna be the launch of the School of Personal Finance, where I want you to have a place to go to educate yourself, but also have the support. So now this is not a one-on-one relationship with me. You're not becoming a client of mine. This is more of an educational type of relationship where I'm gonna be constantly adding content, all for a low monthly subscription. So as of right now, I'm thinking the price is gonna be $39 a month. And then I might have an additional option where I give you access to the right capital financial planning software that you've seen me use in other videos. So I'll have tutorials on how to use it so you can track your own budget, your net worth, and go in there and use it to help you become great with money. If you're interested in joining my first small little group, my test run of people to go through and become a member, shoot me an email, rich at schoolofpersonalfinance.com. Let me know you're interested and I'll let you enroll in that first group for some feedback. We could work together to help me refine it and make sure that I'm providing a ton of value for a low monthly fee. All right, so let's talk about debt. Let's talk about strategies to pay off debt, strategies to use debt, to maybe buy assets, what velocity banking is. And we'll kind of get into the details of what I've personally done in my life, some good things, some bad things, but hopefully you could learn from some of the stuff that I've attempted to accomplish using debt in my life. And I was using velocity banking even before I knew what velocity banking was. And there's different versions of velocity banking. So I was using what I would call a simplified version of it, but people still say to me, well, that's velocity banking. Because when I made that video kind of tearing apart velocity banking, people were like, well, what you described that you did is velocity banking. So I guess I'll try to explain what that was. And I guess it is a form of velocity banking. But the best place to start is you really need to understand the difference between an amortized loan, like a fixed rate amortized loan, like a mortgage or a car loan, and that compared to a revolving line of credit, like a credit card or a home equity line of credit or a personal line of credit. Because there is a huge difference between the two and the strategy, it changes tremendously depending on what type of debt you have. The interest rate plays a huge part. The monthly payment plays a big part because cashflow is a big piece to all of this. Just to quickly explain, with an amortized loan, like a mortgage, or if you have a five-year car loan, for example, your payment stays the same throughout the whole term of the loan. So if you have a 30-year fixed rate mortgage, we're not talking about escrow, taxes and insurance, and that, we're just talking about the principal and interest piece of your mortgage. So your payment, it's the same throughout the entire term. There's a portion that goes towards principal and there's a portion that goes towards interest. As you make payments and you owe the bank less money, more goes towards principal and less goes towards interest out of each payment depending on the outstanding balance that you have. With a line of credit, it's very different. So now with lines of credit, you don't even need to use it. You could get a home equity line of credit and you could just have it available to you in case you need it. You don't have to use it. But when you do use it, that's when the interest charges. That's when the interest starts. And the big piece to this is that the interest, they look at your daily outstanding balance, all right? So they look at how much you owe each and every day, they multiply that amount by the interest rate and then they divide it by how many days are in the year, 365 days to come up with the amount of interest that you owe for that single day. And then what they do is at the end of the month, they add up the interest charges each and every day and that total is your monthly bill for the month. And it is an interest-only payment. With home equity lines of credit, they're usually interest-only for a certain period of time, maybe for the first 10 years or so. For lines of credit that you get at the bank, it might be the same thing where it's interest-only for a certain amount of time and then after that, you have to make higher payments, you have to make principal and interest payments. But the way that they work is that they're revolving. So you could use the line of credit, then pay it down, then use it again, pay it down. And if you have extra money and you just want to dump it in the line of credit, by doing that, you're going to reduce the amount of interest you pay because they're looking at it on a daily basis. Now, to even take a step back before I even really jump into this, like the first thing that you need to do is you need to know your number is cold. You need to know what your income is. You need to know what your monthly expenses are. And the exercise of going through this, I call it turning the lights on. Like you really need to know where your money goes. So like the first week of every month, I'll go back and I'll look to see where did all my money go that month? Where did I spend my money on? And I know my number is cold. So it's important to see what your cash flow looks like. Hopefully there's a big difference between money coming in and money going out. But if you have a lot of credit card debt, then that is probably not the case or else you wouldn't be in a lot of credit card debt. So the first step is assessing your situation and understanding what is going on. The last thing you want to do is borrow money to try to get yourself out of not having enough money. So it doesn't make any sense to do that. So the first step, understand your numbers, know where you're at, get it in your mind that you're going to get out of debt. And if the situation is bad, you do the debt snowball. You do the Dave Ramsey method of getting out of debt where you rank all of your debts by the lowest balance to the highest balance and you just attack. And you get in that mindset of like, I need to cut back in life. I need to figure out ways to create money that I could throw towards this debt and get out of it. So now once you've educated yourself, you've looked at your numbers, you know exactly how much money you're spending every month, how much money is coming in, you're determined, you're ready to become great with your money, that's when you could start thinking a little bit outside the box and looking at ways that maybe you could accelerate your debt payoff or maybe accelerate starting to invest for retirement or grow your assets. So anytime I'm looking to pay off crappy debt that I have by using another debt vehicle like a credit card or a personal line of credit or a home equity line of credit, the major things that I'm looking at are the interest rate, number one, I don't want to pay off debt with a higher interest rate loan, it just doesn't make sense to me. And also the amount of cashflow that I could free up by doing this. So if I have four different loans that I'm making payments on and they equal $1,500 a month, say, and I could take a personal line of credit or a home equity line of credit and I could consolidate them over there and free up the cashflow while also lowering the interest rate, then in my mind, that makes sense. I still have to be committed to now paying that balance down. My goal is to get out of this debt, right? I don't want this debt. I'm not using it for, you know, to go buy more crap now on those things that I've opened up. If I just paid off a credit card, the last thing that you should do is go use the credit card again, right? But consolidating it to a lower interest rate, it could make a lot of sense, but you have to be very focused on now paying that off and down to zero. And then to take that a step further, right? The goal is to get out of all this bad debt. You don't want any of it, right? So if you do this and you concentrate on paying off that personal line of credit or the home equity line of credit, once you do pay it all off and now you have no more debt and you have this line of credit available to you, then the question is, do you park savings in cash? Like an emergency fund, do you have it in cash? Or do you instead invest money and rely on that line of credit as your emergency fund, as your backup fund? And this is where I decided to do that second option in my life. So now, before you do something like this, again, you have to be very well educated and understand your finances very well. And you have to assess all the risks of what could happen in your life. But I made the decision, and this was when I was much younger, I had a home equity line of credit on the condo that me and my wife bought. I was in my early 20s at the time. But I wanted to like max out my 401k. I wanted both of us to max out our Roth IRAs or traditional IRAs at the time. And what I would do is instead of keeping savings for an emergency fund, because I knew that I needed money in case of an emergency, I had my home equity line of credit act as my emergency fund. And in some cases, I actually even borrowed against it to make sure that I was able to max out my retirement accounts. Now, this is riskier, right? And I have a tolerance for risk, but this was bringing the risk level up a little bit. But I also in my mind knew what emergency levers I could pull. So I never used, you know, I think I never used more than 50% of the home equity line of credit. So I still had money available if I needed to pull it. But now the risk with that is what if the bank ever froze it on me or if they called the line of credit, then I could be, you know, in a pretty bad situation. So what other emergency levers did I have? Because I really wasn't keeping any cash in the bank. So other emergency levers would be like my 401k that I was maxing out. I knew that worst case scenario, I could take a loan against it and pull some money out of it. Yes, you pay interest on it, but for my 401k plan, I was paying interest to myself. So I might miss upside in investments if I'm pulling money out of it and the market goes up, but I was willing to live with that. So that was another emergency lever for me. And I also did have other credit cards where I had lines available where in, you know, worst case scenario, I could just charge things up and, you know, wait till I could pay them off. But that was, you know, again, a last resort. So I had my different levers that I could pull in case of an emergency. And what I did was I really started using all of my available cash to then invest. Now, another example of where I use the home equity line of credit was when I bought my first car. So I bought, I mean, it was not an expensive car. It was a Hyundai Elantra, I believe. And this was like in, you know, maybe 2004, 2005. And instead of taking out a car loan, I decided to use my home equity line of credit and pay cash for the car using the home equity line of credit, right? So I borrowed the money. So I didn't have a car payment, but I had this home equity line of credit payment. But what I did was every time I got paid, I just threw all my money in that home equity line of credit. And then I just charged all of our expenses throughout the month and then paid off the balance in full using my home equity line of credit. And then I would just rinse and repeat. So all of my income for the month, I would just take my paychecks and dump them into that home equity line of credit, use a credit card, pay it off and keep on doing that. But I was laser focused on paying off that car loan. I mean, it was on my home equity line of credit, but I pictured it as a car loan and I wanted to get rid of it as soon as possible. And I did, I was done with it. Like I would say in less than two years, I paid that thing off while I was still contributing to my 401k and my Roth IRAs and everything and trying to invest as much money as I can. But I was very focused on getting that home equity line of credit back down to zero. And then I use it for other things as well. Like even when we bought furniture a few years later, I remember using my home equity line of credit and then just being laser focused, taking all my income, all my savings, just dumping it in the home equity line of credit until I got that thing back down to zero. And then rinse and repeating with whatever the next big purchase was going to be. But all this time, I had very little savings in the bank. I really didn't keep any cash in the bank. I would just pull from my home equity line of credit. So there's obviously a risk to doing this way. And you have to be very well educated and understand all the different moving components and the risks that are involved with your income, with your job, all that stuff, and what levers you could pull. Even years later, when we moved to the house that I live in now, we built this house, it was back in 2012, and we put a pretty hefty down payment on it. So I had equity in the house. So I did get a home equity line of credit shortly after we moved into the house. And it wasn't right away, but a couple of years later, I did use those lines of credit to start buying rental real estate properties. So I took the down payments from my home equity line of credit and some savings that I had at the time, and I bought a bunch of rental properties. And in my mind, I was looking at it like, you know what, the income that I'm going to get from these rental properties, it's going to be more than the payment that I have on my home equity line. Now, obviously there are a lot of risks that go with this. You have to be very comfortable doing it, but it accelerated me being able to buy these different rental properties, right? But God forbid, if something happens, if I have tenants that are not paying me, or if something happens to my job, my home is at risk because I borrowed this money against my home equity line of credit. So it definitely could have turned sour on me, but I thought to myself, you know what, as long as they're performing the way that I think they're going to perform, the income from it is actually more than what the payments are on my home equity line. So I'm actually increasing my income by taking on this debt. And then I just got laser focused on paying off that home equity line of credit and trying to rinse and repeat as fast as I possibly could. So all of my savings, all of my income, I was just dumping into that home equity line of credit and just trying to get that balance to go down as fast as I could. So I had enough available again to go make another down payment on another investment property. Now, Dave Ramsey, he would probably call me stupid and go off on me right now for doing this. But to me, it was a way for me to accelerate my investments and grow my net worth. And luckily, the housing market has been good. My tenants have been good. Everything has kind of worked out with the rental properties, but there are many different ways that that could have gone sour on me. But as I was doing this, my net worth was also growing. My other investments were growing. So if I had to, in a worst case scenario, take money out of my 401k prematurely, or take money out of my Roth IRA, or use credit cards, I knew exactly how much I had available in all these different tools or different accounts. And I knew what a worst case scenario kind of looked like. I mean, unless the housing market really crashed and my tenants all moved out, then I could be facing bankruptcy, right? It could turn very ugly. So there's definitely a big risk involved. But hopefully hearing me kind of talk through this and what I personally did in my life, I learned some hard lessons along the way. Not everything was all roses for me, but it kind of gives you some insight into how I did use debt. I did borrow money to kind of build my net worth and buy assets with it. And the last point that I'll kind of leave you with before we wrap up is that the 30 year fixed rate mortgages that I took out on all these investment properties and the 30 year fixed rate mortgage I have on my primary home, I have no intention of paying those off any sooner than need be, right? Because the way that everything's going in this country right now, with inflation starting to go up, with the government printing money, I would rather hold this debt for 30 years because they're going to inflate my debt, even if it's little by little, as the value of the dollar goes down, right? If there's a 10% increase in prices across the board, in goods and services, in incomes, then that's going to make my fixed debt payment, which is going to stay the same, right? That doesn't change. It's going to make it feel like less, especially 10 years out in the future, 15 years out in the future, it's going to feel like a drop in the bucket, these mortgage payments that I'm making. And not only that, but I could increase the rents every year in my rental properties. So that delta between the rent that I'm receiving and my fixed rate mortgages, it just increases. So it increases my cashflow. So I hope that you found this one helpful. I kind of went over a lot today. My main point here is that debt, it could totally bury you. It's very risky. It's not for the faint of heart. You have to really understand how to use it and what's going on. And even when you do understand, things could turn very sour on you and you could be filing for bankruptcy before you know it, it'd be thrown out of the streets. So I'm not trying to sit here and say that, oh, use debt to become rich. It's just not that easy. It's not the way that things work out. And I've been lucky because we've been in a great market for housing, for stocks, for everything over the last 10 years since I've kind of been using these different tools to try to build my net worth. So it could go the other way as well and I could be out on the streets. So just a word of warning. But all right, enjoy the rest of the week. I will see you again in my next video. Make sure to check out schoolofpersonalfinance.com. See what's going on over there. I'll talk to you soon. Thanks.