Myth #1: Velocity Banking Is Only For Paying Off Debt
When people first hear about Velocity Banking, their first thought is paying down debt. When they don't have any debt they immediately assume that velocity banking doesn't apply to them This is not necessarily true Velocity Banking is about increasing our cash flow so if you don't have any debt you can immediately start to create wealth through velocity banking. What we're doing is we were taking simple interest from the bank on a revolving account and using that to invest. We can then take those funds and create more cash flow than it costs. This is the most basic idea of Leverage and it's really powerful. Additionally there a couple of a side benefits individuals who are not as entrepreneurial. The first side benefit is a decrease in credit utilization percentage because you will have more overall credit. The second benefit is access to additional money that you can use as reserves when hard times hit. That's especially beneficial for those that are getting commission based income. Finally, you are going to have access to a line of credit that you can use to make large purchases like a car that would otherwise be purchased with a loan. We can then use the sweep technique to pay off the line of credit.
Myth #2 Velocity Banking Is Only For Mortgages
When people are first introduced to Velocity Banking, they start looking at loans in a different way. They notice how much interest they are really paying over time and assume that longer amortization periods are worse. It is important to realize that if you take a 30-year loan and make the same payments required by an identical 15-year loan, it will be paid off in 15 years with the same interest owed. Amortization only controls how much principal is in each payment. Instead of amortization periods, a better way to measure loans is to take the loan balance and divide it by the monthly payment. A higher score is better as that means we are using less cash flow to meet the debt obligation. Similarly, when we are choosing which loan to target with Velocity Banking, we should choose the loan with the lowest score, as it requires more cash flow each month for a lot less money.
Myth #3: Investing Is Better Than Velocity Banking
Finally, a lot of people only see Velocity Banking as a way to reduce debt. They understand the value of leverage and instead choose to make the minimum payments on loans and save the difference for an investment. This is very advice in the financial world, but it gets a little more complex when we add Velocity Banking to the mix. When we focus on just the cash flow, we can overlook some of the benefits provided by paying down debt. When we payoff a loan, we decrease our debt to gross income ratio which can then be leveraged to get additional access to capital for investments. We are also lowering our monthly expenses, which makes it easier to survive when the famine hits. The reality is that we live in a feast and famine world, so we need to be prepared for it. No two situations are the same, so its important to look at both strategies in depth on multiple dimensions to compare which one is going to be better for you. This is personal finance, so you should be comfortable that you are making the best decision.