What if I told you that everything you have come to accept as reality is a lie? That is certainly true when it comes to banking. Watch to the end of this video to see exactly how you’re being taken financial advantage of, and what you can do to fix it.
If you’re new to the here, welcome! If you’ve been here before, you know that I like to freely share the secrets of wealth building that I’ve discovered over the last 10 years of building my real estate empire. And you know that I constantly harp on education and gaining knowledge as one of the paramount tenants of success. On this channel, and on our Education channel (link’s in the description), we take deep dives into the strategies that the wealthy use to build and maintain their wealth.
Today we’re going to discuss banking. It seems simple enough, but for most people, myself included, no one ever sat us down and explained to us that banks are businesses, not non-profit organizations here to charitably help us. Now, I’m not saying that banks are evil. I’m saying that banks are capitalistic organizations with the primary goal of making money off their customers - YOU!
Opening up that mental can of worms allows you to realize that asking a banker’s opinion on what we should do with our money, or what bank products we should use, will usually lead to advice that will best serve the bank's bottom line rather than your best financial interests.
I want to share one example that should illustrate this point quite clearly, and hopefully lead you to the same conclusion I had when I saw it for the first time - QUESTION EVERYTHING!
The example I’m going to use is for hypothetical purposes to illustrate an average american family using common bank products, and the long term effect that has on their finances. Your personal results may vary.
Average American Model
Let's dive in. Okay, let’s say our hypothetical average American household makes about 60 grand a year. That's five grand a month. So, when they get their money from their job, what type of bank account do most people put it in? checking and savings! Why? Because that's what we were all told to do. So, we didn't ask any questions.
Now, I’ve come to dislike checking and savings accounts. If you study and understand anything about the banking laws, you'll know that these are referred to as deposit accounts. Deposit accounts are where the banks can take your money, and everyone else’s money that's been deposited, and use it to extend loans, and invest in markets, and other things designed to make the bank more money. Again, there is nothing wrong with that. What they’re doing is perfectly legal. What I have a problem with is the lack of education to the people like you and me who are told to put our money there.
So, when you put your money in the checking account, they take it, they go invest it, make the bank money, and then give it back to you when you ask for it. They're essentially using you like a line of credit.
One of the drawbacks to putting your money in a checking account is that it keeps you on a cash basis. When you're on a cash basis. You have to slice up the pie in your head sometimes before the check even gets there. “Okay, I’ve got a house payment coming due… I’ve got to slice out that piece of the pie. no one can eat that piece of pie, because that's for the bank. I’ve got a car payment that's coming, I got credit cards, I got to set aside those slices of the pie.”
And the problem that I have with that is that everything you know about banking comes from the bank. I've had people stop me when I say that and say: “wait a second, you just mentioned credit cards. I hate credit cards. I've always hated credit cards. My mom or my grandpa told me, credit cards are the worst.”
Well, guess what? There's a psychology to how the bank wants you to think about their products, including credit cards. Let's return to the example. Let's say this family has a credit card over there on the left hand side. Let's say it has a $15,000 limit, and it's the day before the Super Bowl. So, mom and dad go down to the electronic superstore and pick out the 80 inch TV with the sound system and the popcorn maker, and the microwave. And they take all that stuff up to the front, and the total comes to $12,000 even. So, they swipe their card, and there's now a $12,000 balance on the $15,000 card. They go home, set it up, and watch the big game. And then the next day they pay off the card. How much does the bank make when they behave like that? Pretty much nothing. They had a balance on the card for two days. The interest the bank will collect will be pennies. Is that how they want you to behave with a credit card? Nope.
So, with one hand they say hey, don't use credit cards. They're scary. They'll hurt you. And then with the other hand they send us offers in the mail. “Hey, if you sign up for this card you’ll get 0% interest for a year!” And some of us sign up, while others say “nah, Mom told me no. I'm just going to rip it up and throw it away.”
But then they send you the vacation rewards offer. Anybody like to travel? Yeah, me too. That’s tempting. So, some people cave: “If you use this card every day for 30 years, I might have enough points be able to go to Hawaii one way! And you know what, I might want to go to Hawaii one way. So, I'm going to sign up for this card!” They get some of us, but the rest of us are like no, I hate credit cards!
Federal Reserve Bank of Atlanta data released in May 2021 found that in 2020, 79% of consumers had at least one credit card. I'm guilty. I have several. They get us with that amazing marketing! They send YOU the one with the little kitten on it! Yeah, they saw you coming man. They send you the one that they knew would get you: the cute kitty card. And you're like: “HOLY CRAP! The cute kitty card! How’d they know I love cute kitties?! I'm signing up for this thing.” And so, you fill out the application, send it in, and check the mailbox every day for 10 days. When it finally arrives, you rip it out of the envelope, pull out the card in excitement, and see the little magnetic stripe across the back. “DANG IT! They got me! I signed up for a credit card! Well, what the spouse doesn't know won’t hurt them, right?”
So, you put that in the safe - out of sight out of mind. Just forget about life goes on, and life happens as it does. I think we've all been to a point at some point in our lives where there's more month than money left. You know you’ve got a week before the paycheck is coming in and the checking account is zero. And the fear sets in. You get the cold sweats and the tingles down the spine. You're thinking what are we going to do? I’ve got bills to pay, I’ve got mouths to feed! The creditors are already calling asking for money. “I’ll just move to Canada! They’ll never find me there! I could sell one of my kidneys… That will get me by for at least a week… [flash text: No Kidneys Were Sold in The Making of this Video]. Wait a second. We got the Cute Kitty Card in the safe! Good thing I signed up for the Cute Kitty Card because we're desperate right now!”
So you swipe for a little gas because you're desperate. Swipe a few groceries because you’re desperate. The spouse isn’t looking, so you swipe for the big TV cause you’re desperate. And before you know it, you've got $12,000, racked up on the Cute Kitty Card, because you were desperate. And when you're desperate can you afford to pay it off the next day? Nope! You stretch that sucker out as far as it'll go. And you make the minimum payments every month, for seven years.
There's a certain way the bank wants you to think about their products, get it? So, what they tell you is pay the minimums on everything and then budget for your lifestyle. And with what's leftover, we'll put that into taxes, retirement and savings.
And, of course we have to put a little bit of money into savings! That’s what we’ve always been taught, right? hahaha….. What happens if there's an emergency, or a rainy day? Well, I don't like savings accounts for the reasons that I mentioned. But also, it's just a pile of money that's just sitting there. And the strategy is, I'm going to hide behind this pile of money. If something scary happens, I can just maybe throw some money at it, see if it goes away.
In reality, most days are not rainy days. So, when it's not a rainy day, it's just a pile of money sitting there doing nothing. Robert Kiyosaki said the money in motion is an asset, and money at rest is a liability. I also don't like the savings account strategy because what that does to your cashflow. It contributes to making you paycheck to paycheck. And it doesn't matter what level you're at, you could be making $60,000 a year or $600,000 a year. If this is your strategy of how you do things. You're just broke on a higher level. Because the cash flow is zero.
I'm looking at a lot of models. I'm looking at Rent models and looking at flip models, Victoria's Secret models. Just kidding. In any financial model, cashflow is king! Let me be clear: to the wealthy, cashflow is king! If cashflow is low, zero or negative. The model needs to be fixed.
Interest Scales
Let’s move on to interest for a moment. You’ll see that in our hypothetical family’s finances we got a couple of interest rates on the screen here. Some are at 6% over on the loan side, we’ve got a 21% on the line of credit side with the credit card. If the bank came to you and gave you a choice between paying 6% interest on borrowed money vs. 21% interest, which would you pick?
Did you say 6%? I think most people would, based on the training we all received in public education and from our parents. This is, in part, how the bank gets you to use they products they want you to use.
It's actually a trick question. Let me use another example to make my point here. If I told you that 32 degrees was the freezing point of freshwater at sea level? Is that a true statement?
Think about your answer. Lock it into your brain. What did you say? If you said NO, you were correct. Because I was using the Celsius system.
“Oh, wait, can I change my answer?” You see, I left off something very important. I didn’t tell you the scale or system of measurement I was using ahead of time. Now this is a true statement: 32 degrees Fahrenheit. Zero degrees Celsius is the freezing point of freshwater sea level. That is a true statement.
What happens if I do this? Which one's hotter? Wait 1 is hotter than 32? How can 1 be hotter than 32? It's a lower number. It's a different scale. It's a different system.
Guess what… that's what the bank's doing to us. Here's what I mean: Anything called a loan, by definition, is amortized interest and one directional in nature. That means you pay it and that's it. You can’t take it back out. Anything called a line of credit, by definition, is daily simple interest and revolving. What does revolving mean? Well, a credit card is an example of a line of credit. And if you have a maxed out credit card and you make a payment, it's going to open up a little bit of room on that credit card. We call that leverage. You can take that leverage in the form of your little piece of plastic down at the gas station, and you can swipe it and put some gas in your car. That's pretty normal. But when was the last time you ever swiped your mortgage to buy gas? When's the last time you swiped your car loan to buy gas or your student loan? You can't. Because it's a loan. It's one directional. You pay it and that's it.
Loans and Amortization
What about amortization? What is that? Let’s use our hypothetical family’s house as an example. On a $200,000 mortgage at 6% interest, average payments would be about $1200 per month. So they buy this house, move in and make their first payment of $1,200. A couple days later, the bank sends them their statement in the mail. They look at the statement, and it says “thank you for your $1,200 contribution to your mortgage. We allocated $250 of your payment to principal, and the remaining $950 to interest.
“Wait a second. I thought we had a 6% mortgage. That doesn't sound right!” So they call the bank and get all mad: “RAH RAH RAH RAH”. And the banker says: “wait a second. Wait. If you turn to page 47. In your statement, you'll see that the amortization table criss crosses about halfway through, and actually, by your last payment it’s inverse, you'll pay $1200 bucks, and $950 It'll go to principal, and $250 of it will go to interest, so it all evens out!” And the homeowner says, “oh, phew… I thought you're ripping me off for a second!”
Here's what I don't like about that. How many people do you know that actually make it to the last payment on a single mortgage? Most people don't. In fact, the average American refinances every seven years or gets into a new loan that puts you back at the beginning of the amortization schedule, which means they're paying mostly interest THEIR ENTIRE LIVES! Which the bank, of course, loves!
And you know what, if you get to about five to seven years without refinancing, they'll start calling you. Anybody else get those calls from the bank? “Hey, if you refinance we can lower your payment. If you refinance, we can lower your interest rate. If you refinance, you could pull some money out… Please, please, please refinance.” Because they want to keep you paying mostly interest.
Let's take a look at a 48 month snapshot on our hypothetical family’s mortgage. In just the first four years of their mortgage, they will pay about $57,000 towards their house. Only $12,000 of that will be reduced from their principal owed on the debt. The other $45,000 will go toward interest. Does that look fair? Then why are we all doing it? The answer is simple: that's what we were told to do. We walked into the bank we said “Mr. Banker I'm here to buy some real estate. What type of loan should I get?” And he said “Well, you need a mortgage.”
Would you walk into a used car dealership and say “Mr. car salesman, I'm here to get a car what type of car should I get?” He’ll say “well, you need the sports car over here”
CUSTOMER: “The $78,000 sports car? Yeah, but I have a family of seven.”
SALESMAN: “You need the sports car!”
They're going to plug you into whatever makes them the most money. And when you walk in and you ask the sales guy, what type of product should I buy? He's going to say buy one that makes me the most commission. Make sense?
Lines of Credit and Simple Interest
So, let's talk about this from a cash flow perspective. Remember, to the wealthy, cash flow is king in any financial model. When you pay a loan, regardless of how much is allocated to interest and how much goes to principal, you can’t reuse any of it. Principal and interest disappear. That means 100% of the cash flow from that payment disappears. However, with a line of credit, like the one in our example here, the bank only takes their 21% interest out. The rest of the principal returns to the line of credit as leverage and you get to spend it again however you want.
So, allow me to rephrase the question I asked you before, when I asked you if you’d choose to pay 6% interest or 21% interest: Would you rather pay the bank in a way where 100% of your cash flow disappears, or only 21% of it? See, when your frame of reference changes your knowledge increases. And when knowledge increases, behavior changes.
Now that we understand how banking works, let's take this back and apply it to our hypothetical family’s financial model and apply some of the knowledge we’ve gained strategically.
Two rules I want you to remember:
First rule of Velocity Banking is that lines are better than loans, for all the reasons I just described.
The second rule is: the Employee Mindset Individual uses cash as currency. They get paid, we keep it in a cash basis account like a checking account, and they use the cash to pay bills and buy stuff. The wealthy don't do it that way. When the wealthy mindset individual gets cash, they throw it all at debt. Imagine how fast you would pay off your mortgage if you took your whole paycheck and threw it at your mortgage. The problem is because your mortgage is a loan, you don't have any money left over to buy gas, groceries and pay your cell phone bill. But when they obey rule number one, and keep their debt in the lines of credit, they can take their whole paycheck and throw it at the line of credit, lowering the debt balance, thereby paying less in interest, and opening up leverage to use to pay bills and buy stuff. Now that may sound overly simplistic. Let's see what happens when we apply it.
The Velocity Banking Strategy
So when our little family gets paid, they bypass the checking account completely. They throw it all at the line of credit. A couple of really cool things start to happen. First, the bank wanted to see a $600 minimum payment come in for the credit card. Our family just gave them five grand. That covers the minimum almost 9 fold! Now, they're going to do it next month, and the next month and the next month. Will the bank ever ask them for a payment again? Not if they keep it up! So, do they even have to budget for it? Nope, $600 just went right into cash flow.
Also, I think I've made it pretty clear on this channel that accumulation strategies are dumb. Savings accounts are for chumps! Any chumps out there? Didn't think so. Not anymore. Add that to the $600 and they just found $2,000 a month in cash flow! They still have some payments they’ll need to make, and they still have a lifestyle they want to live, so we won't adjust their lifestyle - we'll just leave that the same.
To review where they’re at right now, that makes it $5,000 In $3,000 out and $2,000 a month going towards cash flow. When cash flow increases, Velocity increases, and they start paying off our debt even faster. They had $12,000 worth of debt in their line of credit, they threw $5,000 in it that went down. They have $3,000 worth of monthly bills they have to pay, so it goes back up by three grand. That's month one. All we have to do is just repeat that process over and over and over again.
At this point you might still be stuck on the fact that I told this family not to save anymore. What happens if there's an emergency? Well, throwing all their money at the line of credit created leverage. Do emergency rooms take credit cards? Yep! Do tire shops take credit cards? Uh huh. Even if they have an emergency that only takes cash, they can still take that credit card down to the ATM, slide it and pull out some cash out of the line. When there's no emergency (which let’s be honest - is most of the time), they just keep doing what they were doing.
Before they started this process they had $12,000 in debt on the card. They were attacking it with $2,000 a month in cash flow. $12,000 divided by $2000/mo. That's six months to pay off a credit card that would have taken them seven years by making a minimum payment of $600! And that’s without getting a raise at their job OR changing our lifestyle. All they did was change their mindset.
Now the bank looks at this and they say “Man! These guys are really good at this debt stuff! They're using a lot of it, they're paying even more of it off! Their credit score has gone through the roof! We're going to give them a credit limit increase.” If you’ve ever been a victim of a credit limit increase before, know they exist… We know as wealthy mindset individuals that credit and lines of credit should only be used for ASSETS or EMERGENCIES. That means the bank just gave them $10,000 for their asset and emergency fund!
When's the last time the bank came to you and said “Hey, you saved like a champion here's 10 grand for your savings account”? NEVER!
If they do you need to let me know where you bank because I want to get a piece of that.
When we behave like the wealthy mindset we're rewarded like the wealthy mindset.
Okay, our little family has a problem now. They were dumping their money into this line of credit because they had debt in there, but they paid the credit card down to zero. And, last I checked, you can't pay a credit card balance below zero. So, the money's just going to start flowing back into their employee mindset account or checking and savings. They don't want that!
It’s ok, because they still have a lot of debt over on the loan side - the 100% cash flow debt. So they start moving some of the debt over to the cheaper side. Have you ever received those balance transfer checks from the credit card companies in the mail, and wonder “What the heck am I supposed to do with a check from Discover card?” I’ve got an idea... Whatever the amount was that they paid off in the line, in this case, we use the example of 12 grand, They’ll write the check to whomever their mortgage company is. “$12,000 principal only” and mail it off. The next day, our little family looks at their account online, and sure enough: the principal balance on the mortgage drops by 12 grand. For the mortgage company, this is the same as cash. But our little family knows that they just moved the debt into line where they’ll just continue attacking it the same way they did before.
So, before they were able to pay off $12,000 in six months. If they do the same thing they should expect the same results. They'll pay off this $12,000 chunk in another six months. Now let's make a comparison. If you remember back to that 48 months snapshot on the mortgage, it took them four years and cost us $45,000 in interest to pay off $12,000 in debt. On the line or credit side… I’m putting the math up here for you so you can check my work… $12,000 times 21% annual interest, it only took them six months, so divide that by two. It only cost them $1,200 and six months to pay off the same amount of principal! I just saved them more than $43,000, 3.5 years on their mortgage! You're welcome!
All they have to do at this point is repeat the process over and over and over again until they pay off their mortgage. If we extrapolate this math they will pay off their 30 year mortgage in roughly five years! And that without them getting a raise at their job or changing their lifestyle! Now if they don't have a mortgage anymore, they don't mortgage payment anymore either. So when they attack the car loan, they pay THAT sucker off in six months. They don't have a car loan anymore, so they don't have a car payment. Where does that money go? Cash Flow!
Six months to pay off the car, six months to pay off the credit card and five years to pay off the mortgage. In six years, this family is completely out of debt! And they never had to get a raise, or change their lifestyle.
Anybody feeling lied to by the banks at this point? Why didn't they tell us this? They don’t tell us this because they want our money.
As a debt pay down strategy by itself, this Velocity Banking Strategy is pretty valuable. I hope you feel like you've gotten some good value watching through this video to this point. If you’re satisfied, you can stop the video here, educate yourself around this strategy a little more and go out and change your future! HOWEVER…. I know a lot of people come here to learn about real estate investing strategies. So, if you’re interested, I’m going to spend the rest of this video talking about how to take this strategy to the next level!
The Next Level
Okay, in this example our little family paid off a $200,000 house, and now they’ve got a debt-free piece of real estate. One of the reasons I love real estate so much is because it's leverageable. So, they’re going to take their $200,000 house down to the bank and say “Mr. Banker, I was here six years ago, you told me to get a mortgage. You were totally wrong. Don't ever tell anybody that again! Today I'm here to get a HELOC.”
For those who don’t know, HELOC is an acronym for Home Equity Line of Credit. It’s a Line of Credit that is secured by your home equity. Being a line of credit, by definition, it’s revolving and uses Daily Simple Interest instead of Amortized interest. It’s a perfect to for the Velocity Banking Strategy!
Remember, the rules of Velocity Banking say that we can use lines of credit for assets or emergencies? No emergencies right now. So, what is our little hypothetical family going to do? BUY SOME ASSETS!
Ok son, when the mama house meets the daddy HELOC, they fall in love. And, if the mama house has enough equity, they create a bunch of little baby houses! I love it when the mama house creates baby houses because I can rent the baby houses out and make cash flow!
So, our little family gets a HELOC with a $200,000 limit, and they split it up in a little $20,000 chunks and we go and make down payments on 10 rental properties, beit seller-financed or traditional mortgages. If each rental in this example gets $400/month in cash flow, and they pick up 10 of them, that's four grand added to the cash flow! Add that to the cashflow that they got from paying off all of our debt that puts them at $7,800 a month! As they continue to do Velocity banking to pay off the HELOC, they’re able to pay it down to zero in two years!
We’re now at 8 years with our little family. Six years to pay off their debt, and 2 more to pay off the down payments on the rentals from their HELOC. Let’s take this all the way to a decade, shall we?
After they pay off the HELOC, they’ll start attacking the little baby mortgages. If the baby houses each have $100,000 mortgage on them and they’re at $7,800 a month in cashflow, they’ll have the first rental paid for in 13 months, now we're at nine years and change.
Add that mortgage payment to the cashflow and the second baby house will be paid for in 11 months! They’re at exactly a decade, paid off all of their debt, acquired 10 rental properties and paid two of them off without ever getting a raise at their job OR changing our lifestyle.
Conclusion
This is an incredible strategy that I have watched change peoples lives! But, I’m not your attorney or your accountant or your financial advisor, so I’m not qualified to give you direct advice that would be applicable to your exact situation. These are just some of the things that I’ve picked up along the way and have found success with. There are ALWAYS risks in any of these strategies, so make sure you’re educated before you go out and try any of them on your own!
A great place to start is our weekly live education webinar! Get access to our nation-wide community of real estate investors! We meet on Zoom every Wednesday at 7pm Mountain Time for exclusive trainings, real deal walkthroughs, question and answer, guest speakers and all around real estate investor shenanigans. Beginners, experts and everyone in between is invited. Just go to www.MitchAndMaeliLIVE.com Wednesday at 7pm MST. There is no better place to start getting your investor legs! Best of all - we made it FREE just for you! Can’t wait to talk with you live!
I’m curious what you thought of this article. If you have any thoughts you’d like to share or if you would have done things differently, please reach out and let me know. I’d love to hear from you! We’ll be bringing you some more amazing content very soon! See you on the flip side!
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