Velocity Banking is a process used to pay off your mortgage, student, or car loans as fast as possible. Learn more on our Getting Started page. Velocity Banking involves paying down your mortgage in principle “chunks” every x number of months using “extra” savings or a line of credit. To really prepare for low risk, high speed velocity banking, you need to take the following steps:
Step 1: Create an Envelope Budgeting System
There are many different ways to budget. In my opinion, the envelope system is the most effective way to budget. You can purchase an envelope budgeting spreadsheet from my Shop, create your own spreadsheet, or find a budgeting app that works for you. Try to find ways to lower costs. Shop around for estimates. Unbundle services that you are not using. I can’t believe how many people are still paying for a landline phone because of an internet bundle. Speaking of phones:
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Cancel your gym membership and spend more time exercising at home or outside. Look for cheaper insurance quotes, change your internet plans, and consolidate your debt onto a 0% introductory period credit card. These small changes could save you hundreds of dollars each month.
Step 2: Set Your Contributions
Let’s be clear. Historical data tells us that you will make more money if you invest your extra money rather than use it to pay off your debt. The difference? Saving on debt interest is guaranteed. Making money in the stock market is not guaranteed even though the returns are historically greater than investing in real estate. If your priority is paying off your mortgage, I would still recommend you invest at least 15% in retirement contributions. This includes your 401k, IRA, HSA, 457b, or any other investment account you have. Your investment money could double every 7 years due to the power of compound interest. Time in the market beats timing the market. With your investment strategy down, you will have a better timeline for paying off your home. To figure out your loan payoff timeline and potential interest savings, you can download the Loan Amortization Spreadsheet from my Shop.
Step 3: Make More Money
There are many opportunities out there to do this on your own time without affecting your full time job. Some examples include Uber, Lyft, Door Dash, Post Mates, InstaCart, Fiver, Etsy, Zazzle, and my personal favorite, Neighbor. As a Door Dash and Grubhub driver myself, you can follow my side hustles here. Earn Passive Income by creating online courses, selling T-shirts, or advertising. Increase your main source of income by earning a new certification or simply look for a new job.
Step 4: Stop Saving After You Fund Your Emergency Savings
Now that you increased your positive cash flow by following steps 1 and 3, you can save quicker. Save 6-8 months of your monthly expenses for a rainy day. This will significantly reduce the low risks associated with velocity banking.
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Once you have your emergency savings setup, put ALL of your income into paying off your debt. Whenever you need to pay for a car repair or a large medical bill, you can dip into your emergency savings and build it back up to 6-8 months.
Step 5: Pay the Right Amount of Taxes
You don’t want a tax refund and you don’t want to owe money come tax season. A tax refund means the government is holding money that you could have used to pay off your loans OR invest earlier. Time is Money! Waiting for the refund takes time and you are being charged interest on your loan during that time.
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Step 6: Build Up Your Borrowing Power
Increase your credit score to at least 700. To build up your credit you need to continually make all payments on time and lower your credit card utilization to less than 8% monthly. If you don’t have any credit history, you need to apply for credit cards or small loans you know you can pay off quickly. Once you get your credit score over 700, you can quality of very good credit offers used to perform the velocity banking process.
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Step 7: Choose Your Bank
Find a bank that offers a zero fee, zero minimum checking account, AND a zero fee, low interest HELOC, or Home Equity Line of Credit. Here is a list of the Top 5 HELOC’s I could find. Open an checking account with the bank of your choice. The balance you put into this account should be the minimum balance required by the bank plus your average monthly expenses. For example, some checking accounts require a minimum balance of $500, or else they will charge you fees. Your monthly expenses may average $3000, so you need to keep a minimum balance of $3500 in this account at all times. Think of that $3500 as the new $0. You don’t ever want to spend that money. It exists as a safety buffer to keep you over the bank’s minimum balance requirement. Once you have created this account, setup direct deposit so that all of your household income goes into this account.
Step 8: Change Your Due Dates
Call your credit card, utility, subscription, and insurance companies and ask them to change the due date to the 1st of the month, or the day after you typically get your paycheck if you are paid monthly. For utility or phone bills that cannot be changed to the 1st of the month, setup automatic recurring payments with your credit card. You can always change the payment due dates of credit cards. Be sure to use a credit card that offers cash-back or points. This will make velocity banking much easier for you once you start, and it will save you more money in credit interest.
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Step 9: Open A Line Of Credit
If you own a home and you want to pay off your mortgage, the best route is to apply for a HELOC, or Home Equity Line of Credit. If you rent and want to pay off your student loans, your best option is to find a 0% MasterCard (NOT VISA) that offers balance transfers. I have nothing against VISA, but this strategy does not work with VISA. For consumers with great credit, these offers usually include 3% balance transfers and 0% APR for up to 21 months.
Step 10: Be Responsible
Make a plan and stick to it. Promise yourself that you will not use the increase in cash flow or the line of credit to buy yourself a new car or a new TV. If you have a significant other, make sure that they are on board with this plan. Follow the velocity banking method to pay off your loan, then be smart about how you want to spend your money afterwards. Avoid seeking debt when you are still in debt.
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