27 Apr A Financial Advisor Challenges CashMap’s Line of Credit Strategy
CashMap’s Strategy Saves You Thousands
In my earlier post, ‘Keep Those Lazy Dollars Working’, I showed you how you can keep your dollars working and spend between 25 and 40 dollars and save $43,720 in mortgage interest in one year. I assumed you had a 5.5% interest rate on your mortgage. You were able to payoff your mortgage approximately eleven years earlier.
This certainly beats leaving your money sitting in your checking account earning nothing! Only the bank benefits by us leaving our money sitting idle in a checking account.
Whenever I’ve shown this strategy to a financial advisor, I get the following two reactions. First, why do this if you can invest the dollars and earn 10 to 15 percent on your money. Second, this will only work with my most disciplined clients.
Pay Off My Mortgage or Invest?
First, it doesn’t have to be an either or answer. Using CashMap, you can safely do both. Before making a decision review your priorities and what will make you most comfortable. This is called risk tolerance. There are always alternatives; however, what makes you comfortable may make someone else very uncomfortable. This is a personal decision. The main point is to stop leaving cash sitting idle in your checking account!
Each time an additional dollar is thrown at your mortgage, you are one step closer to paying off your loan. Whether it’s a car loan or a mortgage, this can save you thousands of dollars. The earlier you use this strategy in the life of your loan, the greater your savings. Similarly, the higher your loan’s interest rate, using this strategy will bring you greater savings.
For example, if you originally started with a $240,000 mortgage and your balance was now just $100,000, by spending the same $25 to $40, your interest savings at the end of the first year would be $6,069. This is a big difference in savings.
The Older the Loan, the Lower the Savings
Why the big difference in savings? Let’s go back to Our Line of Credit Picture. If you have problems, copy and paste in your browser: http://sdrv.ms/18x1xVb. Look at columns ‘P’ and ‘Q’ (interest and principal), you’ll see that with each subsequent payment that is made your interest payment get’s smaller while the payment amount that is applied to principal is larger. Over time, this means that the closer you get to your loan’s payoff date, CashMap’s savings will be less.
CashMap’s Line of Credit Strategy Gives You Control
What’s important to remember is you have complete control over your interest savings. The outcome is not dependent on the market. Spending just $40 to get $6,069 in savings is better than leaving your dollars sitting in your checking account earning nothing.
This is a virtually risk free strategy!
The only risk is you. This assumes you’ll stick to your budget. So, yes, it means that you are disciplined. Doesn’t knowing that you will have between $6,100 and $43,700 to spend on what’s most important to you encourage you to be disciplined? It does me!
Tweak the Strategy!
Don’t feel like you’re trapped. You’ve built your emergency fund, you are regularly saving and you are not using this strategy as a substitute for preparing for retirement. If you see an investment opportunity that you like, use your line of credit to invest additional dollars. This does carry greater risk; however, greater returns almost always require your taking greater risk.
The bottom line is you need to be comfortable with where you place every penny of your hard earned dollars. If you’re not comfortable, don’t do it! Bankrate.com just published a great article about what to consider when considering paying off the mortgage on your home.
By the way, I’ve also developed an entirely separate formula for using a line of credit for investing. The principle is the same, always keep your money working for you and not for the bank.
Ready to start your journey towards financial freedom? Get started today!
I’d love to hear from you. Please send your questions, topics or suggestions to dennis@cashmapconsulting.com. You can also follow me on twitter at cash_map.
Thanks!
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