27 Apr Lazy Dollars Sentenced to Forced Labor in Your Line of Credit
Some of you are struggling to understand why a line of credit is so much more effective in managing your cash than your checking account. The question you’re really asking is, “Why can’t there be lazy dollars in my line of credit?” There’s only one way to create lazy dollars in a line of credit. It depends where you are going to use the dollars you are borrowing.
If instead of using the dollars to boost your wealth, you spend it on a vacation, your dollars are not building wealth. They are reducing the interest cost that you would have otherwise paid if you financed your vacation on your credit card. Even using this poor example that I can’t recommend, your dollars are better off in your line of credit than your checking account. These are underemployed dollars rather than lazy dollars. They are doing something vs. doing nothing!
You are borrowing money from the bank and using your income to create a deeply discounted loan. The interest rate is going to be less than any rate you can get from your favorite bank or credit union.
Stop and consider the steps you’re going to take. You start the process by withdrawing an amount up to the amount of your income that you just deposited in your checking account. Immediately applying your income to the line of credit wipes out the balance owed. Your money has immediately begun working for you. The bank is not charging you one penny of interest until you make the next withdrawal. This also means that your budgeted positive cash flow is already working before you’ve even begun paying your bills.
In a checking account, your dollars are sitting doing nothing UNTIL you use them to pay a bill. If a bill isn’t being paid, they are sitting around waiting to be put to work. They’re unemployed dollars. They are doing nothing for you.
In your line of credit, because you’ve made a withdrawal and are using the money, shifting your income ensures you are going to pay a fraction of the interest if you hadn’t moved your money. Instead of paying four or five percent interest on your line of credit, your real interest rate will be somewhere between one or two percent.
Now your real task is to use the dollars you have withdrawn from the line of credit to get the biggest return possible. Here are some examples.
- You don’t have enough equity to refinance your 5 percent mortgage. If your real interest rate on your line of credit is 2 percent, your saving money on both sides: line of credit interest and mortgage interest. Once the balance is low enough, you’ll be able to take advantage of the current low rates.
- You want to fund a universal life insurance policy as a part of your retirement strategy. The return is a guaranteed five or six percent on your money. By shifting your income, you’ve created a low interest loan to finance a wealth building strategy.
- You want to purchase investment real estate properties. You have access to hard moneylenders. You have the flexibility of using both your line of credit and the funds from your hard moneylender. Again, you are lowering your borrowing cost.
Using your line of credit does not allow for ANY lazy dollars. This strategy focuses you to identify wealth-building opportunities that otherwise you would have never considered. Unconsciously it makes budgeting relevant. Why? You know your dollars are working for you building wealth. The less you spend the lower your interest cost and the bigger your return. What checking gives that kind of psychological boost to savings? None!!
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