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  • Chris Heeb, The Debt Dr

5 Banking Principles That Can Save Your Financial Life

Updated: May 19

By using these principles and applying them to your debt, we can show you how to pay off your debt, in- cluding your mortgage, in as little as 5-7 years, and convert your debt into wealth!

Principle 1

OPEN END LOANS vs. CLOSED LOANS

An open-end loan is a revolving line of credit issued by a lender or financial institution which is approved for a spe- cific amount. It is very flexible, meaning you can take out as much or as little as you need up to the amount of your credit limit, and once you pay off that amount, you can reuse the line of credit again later. Examples of open-end loans are credit cards and a home equity line of credit, or HELOC. Closed-end loans are dispersed in full when the loan closes and must be paid back, including interest and finance charges, by a specific date. These types of loans are referred to as “installment loans” or “secured loans.” Closed- end loans allow borrowers to buy expensive items–such as a house, a car, a boat, furniture, or appliances and must be paid on schedule or penalties and fines are imposed. The difference between these two types of loans is mainly in the terms of the debt and how the debt is repaid. With closed-end loans the purpose of the loan must be identified with a set time frame whereas with open-end loans, they are not restricted to a specific use or duration, and there is no set date when the consumer must repay all of the borrowed sums. Open-end loans are often used to pay down closed-end loans because of the payment structure. Principle 2

INTEREST CANCELLATION USING AN (OPEN END LOAN)

The first step to understanding how our debt elimination system works, is to have a basic understanding of how interest is charged on a traditional mortgage. As you may already know, the interest you pay on your mortgage is based on three things:

1. How much you owe.

2. How long your mortgage term is. 3. What your interest rate is.

To reiterate our point, here is a quick example of how much interest an example family, the Smiths, would pay on their traditional $300k, 30-year mortgage at 4.5% interest.

Now let’s have a little fun with this. Let’s change just one thing in this example. Let’s say that the Smiths have $5,000 sitting in a savings account and decide to transfer the full $5,000 to their mortgage loan, reducing their principal balance down to $295,000.

With that one change, lowering their mortgage balance by just $5,000, the total amount of interest they would pay over the life of their 30-year loan drops by $13,761.22 and eliminates 12 monthly payments.

As you can see, the less you owe on your mortgage balance, the less interest you pay. Wouldn’t it make sense to try and find a simple way to lower your mortgage balance in order to pay less interest and reduce your number of monthly payments? Obviously, the answer is, “Yes!” So, the next question you may ask is, “Where do I get the extra money to lower my mortgage balance so that I can pay less interest?” The answer to that is where the excitement begins! BANKS HAVE YOUR MONEY WORKING HARD FOR THEM

You see, the banks want you, the consumer, to keep your mortgage and other loans separate from your checking and savings accounts. Why would they want you to do this? The answer is really simple: because they want to make as much money as possible on ALL of your accounts.

Remember, banks make money by lending your money, the money in your checking and savings accounts, to other borrowers. Conversely, they make money by lending the money from other people’s checking and savings accounts to you. In other words, they make money by lending your own money back to you with interest. Keep in mind, as we explain our debt elimination system, that checking and savings accounts are set up to benefit the banks, not the consumer.

Principle 3 FLOAT AND LEVERAGE

Leverage is the use of debt (borrowed capital) in order to multiply the potential returns from another investment or undertaking. Many companies use leverage to finance their assets. In other words, instead of issuing stock to raise capital, companies can use debt financing to invest in business operations in an attempt to increase shareholder value. Consumers can use float to earn interest in a separate account while utilizing a bank’s assets to sustain their lifestyle.

As an example of how float and leverage work together, we will showcase the use of an Advanced Line Of Credit (ALOC) as a”two-way door” account. It allows all of your income to safely offset your debts, while still being available when you need it for expenses. Of course, the other major benefit of an ALOC is daily interest. To better illustrate how daily interest can work for you, let’s walk through a generic one month ALOC money flow example. This scenario may not represent your current situation, but the financial principals displayed in this ALOC money flow example remain the same. In the following example, the ALOC has a starting balance of $7,000. Income is deposited against the ALOC balance on the 3rd and 17th, lowering the balance due. Regular weekly expenses are also paid from the ALOC, as well as a credit card bill and an auto loan payment, each raising the balance of the ALOC again. Finally, a mortgage payment is made from the ALOC at the end of the month.

Fortunately, an ALOC uses daily interest, allowing any income that is deposited against the line of credit to work for the consumer every day that money sits against the ALOC balance. If we look at the balance at the end of each day in the ALOC, the average balance is about $2,990 and this is the amount that interest will be calculated on for this month, not the $7,000 starting balance or even the $3,960 balance at the end of the month. This will result in the interest for this month being less than half what it would have otherwise been!

Principle 4 STRATEGIC PAYOFF

If you’re like most people, you probably have more than one debt: a mortgage (or two), auto loans, student loans, credit card debts, business debts, etc. So which debt should you make strategic transfers to first? Some people recommend that you pay off your smallest debts first, regardless of interest rate, since eliminating the monthly payment for that debt will free up more of your money to go toward other debts and provide you with a cushion to help prevent you from going further into debt when unforeseen expenses occur. This is often referred to as the “snowball” method because with each debt you pay off, you free up more money to pay off other debts, and your disposable income continues to grow, or “snowball”, until you’ve paid off all of your debt.

Other people say to pay off your highest interest rate debt first, so that your money will have the greatest impact and cancel the most interest. This approach has a higher theoretical interest savings and works out better—strictly from a mathematical perspective. However, if not followed carefully, this strategy could leave you vulnerable if you haven’t planned for unforeseen expenses. Both methods have merit.

If you have some advanced spreadsheets and you constantly update them as your circumstances change, you could forecast each of your options and determine the best and safest debt payoff strategy. However, this would not be a one-time calculation. As we all know, life happens. Interest rates, balances, payments, incomes and expenses change, and so too should your strategy. Again, our platform will handle all of these calculations for you and will always suggest the best and safest strategic transfers with the goal of paying off all of your debts as quickly as possible. Principle 5 CONVERSION

It has been said, “Those who understand interest earn it. Those who don’t, pay it.” This statement couldn’t be more true! Those who spend 30 (or more) years paying interest on mortgages, cars, credit cards, etc. are simply making the banks rich—very rich! Fortunately, those who have the right tools and understanding can also become rich! As you may already know, your money has great potential power. If you use it correctly, and with the right tools, your money can multiply almost exponentially. When you no longer have to make interest payments to the bank, the possibilities for building wealth are endless! Feel free to schedule a 1-0n-1 Zoom Call with me for the 5 Quick Examples of how you can significantly increase your income and your wealth!

*All time and interest savings examples, wealth building examples and rates of return in this book are strictly hypothetical. Individual time and interest savings amounts are subject to individual qualification. Individual qualification required. No Financial advice or recommendations have been made as a part of this article.

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