27 Apr Pay Less Interest on Your Line of Credit – Part 2
Principle to Managing Your Average Daily Balance
In my first post of this series, we saw the impact that depositing $1,000 every month on the first vs. the 20th of the month will have the interest payments the bank will pay you over five years. At first, the difference in your savings balance is small; however, by the end of five years, the difference grows to $1,046. Admittedly, our scenario is unrealistic. What bank is going to pay you 20 percent interest on your savings account? You’re missing the point. Over the past thirty years, incomes have not kept us with inflation. Consequently, if we’re going to get ahead, we MUST use every financial tool to our benefit to achieve what’s most important to us.
Stop Using Your Line of Credit Like Everyone Else!
The money sitting in your checking account is at best earning .2 percent. At that jaw dropping interest rate, it will take 360 years to double your money! If you have a line of credit, your interest rate probably ranges between four and eight percent. If you’re like most people, you wait to receive your bill and pay the amount plus and to pay off your balance a little faster, pay a bit more. Using this strategy your bank loves you! Why? Because you owe stays high all month long; consequently, you are paying too much interest!
Let’s say your borrowed $5,200 from your line of credit on the first day of the month. If you’re the typical borrower, you are going to wait until you receive your bill around the 5th of the following month. Your balance was $5,200 for 30 days; consequently, your average daily balance will be $5,200. If your interest rate on your line of credit is 4.5 percent, you’ll owe the bank $23.51 in interest. What if you could reduce your cost of interest to $4.38? That would reduce your effective interest rate to 1.25 percent! Are you interested? Not only is it possible – it’s very easy to do!
Shift Your Income to Your Line of Credit!
Why not use your income to minimize the interest you pay on your line of credit?
What if you were to pay all your bills from your use line of credit? This means that on the day your income is deposited into your checking account, you’ll make a loan payment that at least equals your income. This dramatically lowers the balance you owe on your line of credit lowering your average daily balance. Review an earlier article I wrote, ‘Picture Your Line of Credit’ and the accompanying excel worksheet. In this example, the individual’s deposits $5,025 and after all their bills are paid, they have $1,000 left.
When you look at the excel worksheet, you’ll see that you can use your line of credit like your checking account. Second, you’ll see that all living expenses have been scheduled for payment on the 28th of the month. By taking these two steps, the average daily balance is $1,168 instead of $5,200. At the end of the month, the balance owing on the line of credit is $4,200. Without thinking about it, you’ve made a $1,000 principal payment to your line of credit. How is this possible? The minute you shift your income to your line of credit, you money begins working for you. The balance on your line of credit immediately drops to $175, when you pay your mortgage on the 15th it increases to $1,538 and when you pay the rest of your bill on the 28th, it rises to $4,200. The really cool part is when you’re paid on the 1st of the following month, your balance will be zero. Easy isn’t it?
Learn to Use Your Line of Credit to Build Wealth
Keeping your money working for you 24/7 is easy. We need to start thinking outside of the box. Too learn more about this strategy, read my articles ‘Use a Line of Credit to Pay Off Debt’ and read the rest of my series, ‘Picture Your Line of Credit’. You can also download my free condensed e-book, ‘Working Your Lazy Dollars’.
Thanks for joining me. I’d love to hear from you. To learn more about how to keep your dollars working for you 24/7, let’s chat. The concepts are easy but they’re a bit counterintuitive. Take advantage of our articles, interactive materials, videos and, e-books. Please send your questions, topics or suggestions to firstname.lastname@example.org. You can also follow me on twitter at cash_map.