What is Velocity Banking? [Infographic]

Velocity Banking Strategy Do you want to learn how to pay off your mortgage in 5-7 years?

In this article, you’ll discover what is velocity banking; a different way to do banking and a debt acceleration strategy.

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What is Velocity Banking?

I love the illustration that Dave Ramsey gives in his book in chapter 4 of “Complete Guide to Money,” regarding perspective. He once heard a story of an English professor who wanted to teach students on perspective. The professor demonstrated this by writing the following statement on the chalkboard:

A WOMAN WITHOUT HER MAN IS NOTHING

The professor then asked two students, one male, and one female to provide the correct punctuation for the statement. The young man went first quickly giving the punctuation that made the statement read:

A WOMAN, WITHOUT HER MAN, IS NOTHING.

The young man smiling and confidently assuming the correct punctuation. Now, the young lady had her chance, immediately she erased the young man’s marks and replaced them with hers and made the statement read:

A WOMAN: WITHOUT HER, MAN IS NOTHING.

The purpose of the lesson is simply that two people can have two different interpretations by seeing that same thing. And with velocity banking, it is a different perspective in the way you do banking. In other words, we have always been taught the same way to do banking. That is, get a checking account and a savings account. Deposit your paycheck in the checking account and save as much as you can with a savings account. However, with velocity banking, you have access to the same products as before but you are going to use them differently.

The Benefits of Velocity Banking

1) Velocity banking decreases debt rapidly.Debt Payoff - Velocity Banking

And I mean rapidly. Taking a 30-year mortgage and paying it off in 5-7 years is not abnormal or rare. Some do better some do worst. But the reality is that it rapidly decreases debt.

2) Velocity banking increases the principal paid.

By this, obviously, you are throwing more money to the principle, thus, canceling out the interest. Now, mind you. This is not a pay extra payment type strategy, e.g. paying on the 1st and 15th, or paying extra payments.

3) Velocity banking increases the monthly cash flow.

You will free up cash, that is, your debt obligations will decrease.

4) Velocity banking increases cash availability.

You will have access to more cash. This is critical for creating an emergency fund. Unlike an amortized loan, when you put money into the loan you can’t take it back out. Velocity banking allows you to have access to this kind of funds.

5) Velocity banking creates financial independence.

Obviously, when you erase your debt or know how to use debt to grow wealth. You become wealthier, thus, clearing the path to leverage cash to create financial independence. However, you can also use to build wealth and assets.

6) Velocity banking reduces stress.

Indeed, when there is more money in the bank account and your debt is either eliminated or in control. You reduce stress.

The Velocity Banking Strategy

The velocity banking strategy is actually quite simple. First, you are going to open up a line of credit and then you are going to have all your income go directly into that account. From there, out of the new line of credit account, you are going to transfer bad debt accounts to the line of credit. all your expenses are going to be paid, e.g. food, household items, babysitter, car note, mortgage, etc. In other words, you are going to turn your line of credit into your checking account.

Velocity Banking Defined

Velocity banking is defined as the user of financial and banking products that manage and increase cash flow that quickly creates financial security by eliminating, reducing, or minimizing interest.

Velocity banking is a more efficient way to use your current income.

Velocity banking maximizes your cash flow, leverages and helps you pay off debts in a fraction of the time.

As the old cliche says, “CASH IS KING.” Understanding and controlling the cash flow is the critical component of velocity banking.

“I am a cash flow guy. If it doesn’t make me money today, forget about it.” – Robert Kiyosaki

Why Don’t More People Do This?

Learning basically has three separate levels; What we know we know. What we know we don’t know. And what we don’t know we don’t know.

The majority of our population simply do not know about this way of banking. There are several reasons that this perspective in banking is not known.

Financial gurus don’t know about and if they do know about it they’re not teaching it or writing about it.

Moreover, banks are not bringing it up for obvious reasons. Everything you learn from the bank, you learn from the bank. Banks want to sell products that benefit themselves and if they can get away with selling bad products that are bad for us and good for them. They will consistently do it day in and day out because their customers are not demanding better services and products.

Also, the media doesn’t understand it. Velocity banking is not difficult to learn, however, it does go against our way of thinking about how we are supposed to do banking. Thus, making it can be a little complicated and confusing at first.

Financial advisors never heard of it. Again, we live in a society that always follows traditions and getting out of them is daunting. People don’t like change. Our financial advisors are in the same situation and are taught from the same schools.

Lastly, mom and dad never did it. We love our family but we are a product of our family. If your father is a dentist, chances are you will be a dentist. This goes with any other occupation. We follow who leads us. And if your parents never did this, you probably won’t either.

Understanding Amortized Loans 

An amortized loan is a scheduled payment that consists of both principal and interest. This amortized loan pays the relevant interest for the period before any principal is paid. The majority of loans are dealt through an amortized loan schedule or payment schedule. What we don’t know is the true cost of borrowing on these types of loans.

Let’s say John Smith purchased a house and received a 30-year mortgage through his local bank. The house was purchased for $100,000 at a 5% interest rate. The monthly payment is $536.82. In the very first month of the mortgage, John will pay $120.15 to the principle and $416.67 will go towards the interest.

Velocity Banking - Amortized Loan

It takes about 15 years before your monthly payment towards the principal to get bigger than then interest.

At the end of the 30-year mortgage. John Smith’s true cost is $93,256.52. In total $100,000 for the actual cost of the house and $93,256.52 in interest in that house. That’s nearly doubled for what he paid for the house. Sounds unfair, unethical!?

Velocity Banking - Loan Chart

Here is a quick video that I found that explains amortization.

Understanding Lines of Credit

In the velocity banking strategy, you are going to use lines of credit. These lines of credit can be either secured or unsecured. If it is secured you will have something on collateral, e.g. home, etc. A home equity line of credit (HELOC) is a secured line of credit that uses your home as collateral. There are also other lines of credit, e.g. personal line of credit (PLOC), a business line of credit (BLOC), and even your credit card (CC).

The key to a line of credit is that it is a revolving account. This allows the borrower to spend money, repay it, and spend it again, thus, having a revolving cycle. Your credit card works in this way and it too is a line of credit. In a line of credit, you are also charged interest for what you use. In a standard loan,  you are given the full amount and are charged for the entire amount.

Here is a quick video that I found on what is a line of credit.

Creating the Velocity Banking System

1) Assess Current Situation – monthly Budget

The first step in creating your velocity banking plan is setting the monthly budget. Setting a budget gives the status of your current situation and where you need to go. It will allow you to create more cash flow and see what is actually going on with your income and expenses. Creating a budget may seem elementary, however, it is a very critical step in eliminating debt. And for velocity banking to actually work your income must be greater than your monthly expenses. This may sound obvious but we all been in situations where somehow we are draining our savings and do not know why.

2) Identify Drains on Cash Flow

The second step is to identify what is costing you money or taking money out of your account. We need to identify all expenses and the cost associated with it and also identify the most important accounts to eliminate in order. Everyone’s situation is going to be different, however, focus on the accounts that usually have the highest cost to associated with and can free up cash flow the quickest. For example; Mr. and Mrs. Poor were reading an article on velocity banking at BiggerInvesting.com. They decided to implement this strategy because they wanted to be like Mr. and Mrs. Rich. Mr. Poor made a budget decision and found that the Poor’s mortgage was $1,700 with 29 years to go, car notes were $375 and $125 with a balance of $13,000 together, and both had students loans combined with over $30,000 and a payment of $400 a month. Mr. and Mrs. Poor decided to focus on the car notes because it would free up $500 in 13 months once velocity banking is implemented.

3) Identify Emergency 

In the third step, you need to identify and know what is your safety net. Things happen in life, e.g. loss of a job, a family member got sick, etc. How much do you need? How much would you need? Dave Ramsey’s recommendations are to have a $1,000 as beginner emergency fund and 3-6 months of expenses in savings once you are completely out of debt. However, in the velocity banking strategy, it is not required that you actually save up these emergency funds before you start velocity banking. The account will instantly give you access to emergency funds. Your job is to be disciplined enough to leave your emergency fund as an emergency fund. For example; let’s say you took out a HELOC for $40,000 and you identified that you need $2,000 per month in case you lost your job. Therefore, you need at least $6,000 as an emergency fund ($2,000 x 3 months). That is when you start doing velocity banking. You will always leave $6,000 in the HELOC. Most likely, you will always have access to more because you are constantly paying down the HELOC but your emergency fund is your emergency fund. Also, in the velocity banking strategy, as mentioned before, you don’t need to wait to save up that amount. Once the account is opened you created the emergency fund. It’s just that simple.

4) Select Velocity Banking Account

The fourth step requires you to select the type of account that is best for your situation. They can be lines of credit, e.g. personal line of credit (PLOC), a home equity line of credit (HELOC), a business line of credit (BLOC), and even a credit card (CC). It really depends on what debt you are focusing to pay off and what you can qualify for. In most situations, if you own a home and have a mortgage you may use a HELOC. And with the HELOC you will use the chunking method to pay off your mortgage faster. I’ll demonstrate the chunking method later.

5) Open Velocity Banking Account

Yes, you actually need to open one of these accounts. Honestly, most people fail at velocity banking because they don’t believe in it enough or don’t understand it enough to actually start doing it. However, your finances are your personal responsibility and you must take action for any results.

REPEAT CYCLE FOR ADDITIONAL INVESTMENTS OR DEBTS

Once velocity banking is mastered. Repeat it! Take on new assets and pay off those and continue

What About Tax Deductions?

One of the biggest complaints against velocity banking is those who are concern about their mortgage interest tax deduction. However, if you calculate the numbers you will see that the greater return on investment (ROI) and savings is using the velocity banking strategy. You want to create as much cash flow as you can so you can eliminate debt quickly.

In the example below, you have Tom and Jerry. Jerry loves getting a tax deduction from all the good interest he pays to the bank. On the other hand, Tom has implemented velocity banking seven years ago and he now has no mortgage payment. Both Tom and Jerry work the same jobs, receive the same income at $50,000 annually, and live in the same community. When you crunch the numbers Tom has a financial advantage of $7,470. That’s $7,470 per year, meanwhile, Jerry is saving $2,490. Therefore, the point of this demonstration is to show and prove that it is much better to have no mortgage payment over keeping a mortgage for apparent tax savings.

Velocity Banking - Tax Deductions

Velocity Banking: The Ultimate Debt Acceleration Strategy

 

Questions to Consider

When Applying for a Line of Credit

  • Is there an application fee?
  • Are there charge points?
  • Are there any additional closing costs?
  • What is the approval time?
  • What is the time period of the loan?
  • What is the maximum loan amount?
  • What is the cap for the interest rate?
  • Is there a size limit to the amount of payment or deposit?
  • Is the line of credit renewable?
  • Are the monthly payments interest only?
  • Will the account has a direct deposit feature?
  • Is there a membership fee?
  • Is there an ATM/Debit card or a checkbook?
  • Are there unlimited withdrawals?
  • What is the minimum to borrow?
  • Are there transaction fees?
  • Are there unlimited deposits or payments?
  • How far is your margin above the prime rate?
  • Is there an amount limit to withdrawals?
  • Is there a requirement to take out an initial advance or drawdown. 

This page may contain affiliate links. This website may contain content that comes from Amazon. This website and its pages are not intended to constitute legal, financial, or tax advice. The information on this website and its pages are not intended to constitute investment advice and all content are the views and opinions of the author(s), contributors, or administrators. Please read our disclaimer for more info.

Hi. My Name is

James Gheen

Welcome to the Bigger Investing website. I’m here to help you find the resources, motivation, and guidance for all entrepreneurial, investing, business, career endeavors, and more, so that you can invest in what’s most important. Your mind!

My focus is to equip you with expert sources, books, guides, articles, and more to help you achieve your personal goals.

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