27 Apr Your Budget and CashMap’s Line of Credit Strategy
You’re interested in using CashMap’s Line of Credit Strategy. You’ve optimized your average daily balance by scheduling payments for your day-to-day living expenses to the 28th of the month. Your budget is done and as expected, it’s a work in progress – some months have been better than others. You’re wondering just how close you need to be to your budgeted positive cash flow amount to realize mortgage interest savings and not get eaten alive by your line of credit.
Recap of Our Example
Your take home pay is $5,025 each month and it’s deposited on the first of each month. You have $1,000 left after you pay all your bills. This is your positive cash flow. You’ve saved four months of expenses totaling $16,100. You are saving $300 each month. This is thirty percent of your positive cash flow. Lastly, your have a $240,300 5.5 percent mortgage that you’ve had since May 2009. The monthly principal and payment of $1,362.69 is due on the 1st; however you have a 15-day grace period. You’ve secured a $10,000 line of credit that is charging you an interest rate of 4.5 percent.
Budgeted Cash Flow Didn’t Happen!
As is so often the case, our best-laid plans don’t always happen. The good news is you did put aside $300 a month in savings; your monthly budget is $2,662. Let’s look at the impact of three spending scenarios.
Our first scenario is you meet your budget. Your positive cash flow for the year will be $12,000. The interest that you’ll pay on your line of credit is just $25.53, your mortgage principal payments total $17,639 and your mortgage interest savings will total $43,297.
Our second scenario is you start out strong the first month and you meet your budget; however, the remainder of the year you slip reducing your positive cash flow to $9,800. Your line of credit interest increases to $39.70, your mortgage principal payments drop to $14,511 and consequently your mortgage interest savings fall to $35,301. A drop of $2,200 in cash flow brought a $7,996 drop in mortgage interest savings. The question to be asked is was the additional $2,200 spent worth the drop in your mortgage interest savings?
Our last scenario is you perform under budget and spend $685 less than anticipated. Your line of credit interest cost falls to $22.71, your mortgage principal payments increase to $18,188 and your mortgage interest savings also rise to $44,298. An additional $685 dollars increased your mortgage interest savings by $1,000.
While these differences do not have a significant impact on the interest paid on the line of credit, they do impact your mortgage interest savings.
Small changes do make a difference!
In my next post, I’ll review the impact CashMap’s line of credit strategy can positively impact real estate investment strategies.
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