Does Velocity Banking Work? Payoff Debt & Build Wealth Faster
What is Velocity Banking?
Velocity Banking is a cash flow management strategy that exploits the timing and interest accrual of various loan products, so borrowers can eliminate debt and build wealth at an accelerated rate.
How Velocity Banking Works
Velocity Banking operates by systematically borrowing against a simple interest line of credit to pay down high-interest credit cards or amortized loans like mortgages, which heavily front-load interest onto the early payment periods.
Velocity Bankers then funnel their paychecks directly through the line of credit to minimize the ongoing simple interest cost. Many borrowers will simultaneously run their monthly living expenses through certain credit cards to receive rewards and exploit timing efficiencies, further reducing the total volume of interest paid while paying off their highest-priority debts.
By combining meticulous budgeting with systematic payment efficiency, borrowers optimize their entire household cash flow regime, accelerating their path toward financial freedom with this new discipline.
Table of Contents
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Velocity Banking Strategy to Pay Down a Mortgage Early
The Velocity Banking concept started as a way to simply pay off a home quicker by making additional mortgage payments borrowed from a home equity line of credit (HELOC). Doing so reduces the mortgage balance faster, thereby reducing the amount of interest being paid from all future monthly mortgage payments, and increasing the portion going towards mortgage principal. The more aggressive Velocity Bankers are with this strategy, the faster they pay off their entire mortgage.
The borrower’s paycheck is auto-deposited directly into the HELOC, lowering both the interest accrual and the total HELOC balance. Velocity Bankers focused on mortgage payoff will take out more simple interest HELOC debt as soon as possible to pay down the mortgage principal faster to reduce the amount of early amortized mortgage interest.
Check out more on how to utilize a HELOC to build wealth.
Eliminate Credit Card Debt With the Velocity Banking Process
Debtors who don’t own a home can still reduce high-interest debt using credit cards with 0% balance transfer promotions or personal lines of credit products. Practicing the same Velocity Banking method used with mortgage debt, borrowers can still systematically eliminate cancerous debts by exploiting interest payment timing opportunities and interest rate differences offered by the proper combination of loan products.
Using The Velocity Banking Method to Acquire Assets & Increase Cash Flow
Even after you’re completely debt-free (or at least have eliminated all bad debt), the same monthly payment efficiencies can be applied in a positive cash flow situation to exponentially accelerate their wealth building with financial strategies like:
- Investing in low-cost index funds
- Building up a rental real estate portfolio
- Maxing out tax-efficient retirement plans
- Creating their own infinite banking system
- Or turning their side hustle into a scalable business.
Velocity Banking Relies On Simple Interest Loans vs. Amortized Loans
Understanding the distinction between amortized interest and simple interest payments is crucial within the context of Velocity Banking to ensure paying less interest over time.
- Amortized Loans like mortgages or auto loans have a set schedule for both interest charges and repayments. These loans are divided into equal payments over time, which typically means that a significant portion of a monthly mortgage payment early on in the cycle goes toward paying interest rather than reducing principal.
- Simple Interest Loans like certain lines of credit as well as credit card products allow for variable payments and calculate interest based on your average daily balance over a monthly period. By funneling income and expenses through simple interest products, Velocity Bankers can oftentimes reduce the total interest paid while rapidly reducing principal with extra payments when possible.
Simple Interest Loan Options for the Velocity Banking Strategy
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) is a revolving credit line collateralized by the equity in a borrower’s home. HELOC interest accrues monthly as simple interest, allowing borrowers to withdraw funds as needed, up to a predetermined limit. This flexibility can be advantageous for the Velocity Banking strategy, as it enables individuals to borrow money from their HELOC balance to pay off high-interest credit debt or pay down principal on amortized debt.
When it comes to using a simple-interest line of credit as your primary expense account, there are many velocity banking alternatives beyond the HELOC.
Personal Lines of Credit (PLOC) for a Velocity Banking Strategy
A personal line of credit (or PLOC) can take the role of a HELOC when the borrower:
- Can’t qualify for a quality HELOC product
- Doesn’t have enough equity in their home
- Doesn’t own any real estate
Utilizing personal lines of credit, velocity bankers can better manage high-interest debts as well as front-loaded amortization schedules, all while capitalizing on the benefits of simple interest.
"Paycheck Parking" Enhances the Velocity Banking Strategy
“Paycheck parking” is when borrowers direct-deposit their paychecks into a line of credit or credit card instead of a traditional checking account. By doing so, Velocity Bankers can immediately reduce their outstanding credit card balance, which brings down their average daily balance for the month, thereby resulting in less interest charged over that period.
Using Credit Cards as Part of a Velocity Banking Strategy
Velocity Bankers who integrate credit cards into their overall strategy can accrue incremental benefits that, compounded over time, can prove quite significant. Even once the borrower is out of debt, this practice can help enhance their wealth-building efforts.
Borrowers who use credit cards for monthly bills and daily expenses not only accumulate rewards but also pause interest accrual on these purchases if their balance is paid in full before the due date. This strategic timing of these purchases and payments creates a temporary 0% float in addition to the accrual of 1-5% in rewards.
Taking advantage of 0% balance transfer promotions allows borrowers to move high-interest debt to a card that doesn’t accrue interest for months or even years. Incorporating this tactic effectively pauses the negative compounding long enough for the borrower to knock out their most egregious debts and/or bring down their HELOC balance to absorb the credit card balance by the end of the promotional period.
Asset Backed Lines of Credit
Asset backed lines of credit (ABL) are financial products that allow borrowers to leverage their existing assets to access credit. This can include various types of collateral, such as investment accounts, retirement accounts, or physical assets like gold and silver.
Velocity Banking Pros & Cons
The Velocity Banking strategy offers a repeatable framework that can lead to measurably enhanced financial efficiency. However, this method is not without its complexities and risks, which require strategic planning and precise execution to navigate effectively.
Understanding both sides of the equation is essential for anyone considering Velocity Banking to ensure that its touted benefits will outweigh the challenges involved.
Benefits of the Velocity Banking Strategy:
- Faster Debt Elimination: Enables borrowers to pay off their mortgage faster or eliminate multiple debts at an accelerated pace by strategically funneling the borrower’s monthly income and normal living expenses through a combination of optimally orchestrated loan products.
- Significant Interest Reduction: Decreases the overall volume of interest paid on the sum of their loan products by chunking lump sum payments early in the repayment process of amortized loans or high-interest debt. These liabilities get shifted to more manageable simple interest lines of credit products or perhaps through some promotional 0% balance transfer opportunities.
- Enhanced Cash Flow Management and Flexibility: Optimizes payment timing efficiency by carefully orchestrating one’s expenses and direct deposited paycheck against the due dates of the various debt instruments. This minimizes the negative compounding of interest and maximizes the borrower’s ongoing capacity for emergencies or opportunities.
- Increased Financial Literacy: Deepens the borrowers’ understanding of personal finance and ongoing money management skills, fostering measurably better decision-making for their financial benefit.
- Eventual Wealth-Building Potential: Facilitates an orderly transition from debt repayment to wealth accumulation by utilizing the same ongoing payment efficiencies to accelerate investing into a combination of income-generating assets.
- True Financial Independence: Increases financial control and optionality by reducing dependence on traditional banks through increased creditworthiness and therefore access to alternative credit products, allowing prior borrowers to become their own banker.
If you want to learn to apply the principles of Velocity Banking with other loan options and asset types to maximize compounding while minimizing taxes and loan drag, check out this webinar replay about “4-D Banking.”
Drawbacks of Velocity Banking
- Added Up-Front Costs: Making strides ahead with this strategy often entails an initial step back in the form of account setup fees, balance transfer fees, or financial education costs. Even the slightest increase of initial debt amounts can deter some borrowers from pursuing this method.
- Necessary Discipline for the Added Complexity: Transforming impulsive financial behavior to meticulous budgeting and monitoring is essential to success. Even though much of the ongoing execution can be automated, leaning into financial learning rather than a default of avoidance may prove to be too overwhelming and, therefore, a non-starter for many.
- Risk of Overextension: Leveraging additional loan products to pay down existing debt increases the likelihood the borrower may accumulate even more debt if they fail to maintain the new practices. The added credit capacity could backfire if they lose their job or regress back into the pattern of frivolous spending.
- Market Sensitivity & Variable Interest Rates: Rapidly rising interest rates may force the borrower to re-adapt their plan multiple times to keep up with the changing conditions. Also, a major economic downturn often reduces many lenders’ appetite to extend credit. Even the most successful velocity bankers may find their various lines of credit capped, reduced, or even revoked during housing market drops.
- Emotional Stress: Managing multiple debt payments and the constant need for monitoring may induce anxiety, potentially overshadowing the financial benefits. This emotional strain may lead to compromised future financial decision-making, ultimately jeopardizing the objectives that Velocity Banking aims to achieve.
One must weigh the pros and cons of the Velocity Banking method and make sure they are mentally prepared to execute correctly to move toward financial freedom.
Step-by-Step Guide to Implementing the Velocity Banking Strategy
Step 1 - Assessing Your Financial Situation
Before embarking on the Velocity Banking strategy, it is imperative to meticulously review your income, expenses, assets, and liabilities. Quantifying these variables will help you set realistic financial goals, discover what new accounts are needed to construct an optimal repayment plan.
Additionally, this foundational step serves to highlight any existing patterns in your financial behavior that may need converting to ensure Velocity Banking works in your favor rather than enable more destructive financial behavior resulting in losing money.
Step 2 - Organize and Refine Your Monthly Expenses
Next, you must itemize and organize your monthly expenses keeping these factors in mind:
- categorizing them into essential and non-essential expenditures
- documenting their various due dates to be adjusted when beneficial and where possible
- discovering which expenses can be automatically paid by credit cards (taking advantage of reward points and/or 0% promotional purchase periods)
By refining your monthly expenses, you not only establish a clearer financial picture but also free up additional resources from efficiency to allocate toward debt repayment and future investments.
Step 3 - Setting Up the Optimal Accounts
Establishing these 4 types of financial accounts is critical in successfully optimizing the Velocity Banking strategy to its fullest potential:
- Line of Credit: Start by opening a dedicated line of credit, ideally one with a low interest rate and favorable repayment terms. When possible, a home equity line of credit (HELOC) will serve as the cornerstone for your monthly cash flow management. Otherwise, you can consider a personal line of credit (PLOC).
- Credit Cards with Rewards: When opening a line of credit is not possible or efficient, consider using promotional credit card offers, such as 0% interest on balance transfers or purchases for a period of time. Credit cards with favorable rewards based on your expenses are ideal during the 0% promotional period, but certainly after it ends.
- Checking & Savings Accounts: Having a free online bank account that can process the timely transfer of funds between your different loan products and bills is essential. If you are actively paying down bad debt, then a high-yield savings account isn’t really needed yet because any free cash flow should be devoted to lowering balances.
- Asset Building Accounts: Once you pay down all bad debt at least, you can more carefully consider where to park free cash flow as it comes in. In addition to a high-yield savings account to earn interest on positive cash flow, Velocity Bankers should consider layering in the following accounts for their liquid capital:
Step 4 - Structuring Your Payments Effectively
Begin by prioritizing your debt payments based either on:
- which debts have the highest interest rates
- or which debts have the highest minimum payments
Although it may seem counterintuitive, aggressively knocking out a lower interest debt first may prove beneficial to a comprehensive Velocity Banking strategy since you will free up that higher minimum payment amount to pay down the higher interest debts going forward.
Also, adjusting your various bill due dates to align closer to your paycheck deposits can lower the overall interest you pay throughout the month. Another strategy when running certain bills through your credit cards is to push those bill due dates towards the end of that credit card’s statement cycle to reduce the amount of interest accrual on that card.
Adjusting the timing on these payment cycles can significantly reduce the overall interest paid and shorten your repayment timeline.
Step 5 - Continually Monitor These Key Metrics
It is essential to monitor the following 5 key metrics both when you begin Velocity Banking to establish a baseline, but also to measure the effectiveness of your execution:
- Monthly Cash Flow: It’s crucial to monitor the timing of your monthly inflows and outflows so you can realign your Velocity Banking strategy when necessary. Things change: paycheck amounts may differ, payment timings may change, and certain accounts may get paid off, all of which may cause you to restructure your plan.
- Volume of Interest: All too often, borrowers will focus solely on the interest rate being charged, not taking into account the actual volume of interest being accrued. Once you have your specific Velocity Banking strategy in place, it’s crucial to track and measure the actual volume of interest levied against you. You may discover you’re paying much less than the stated interest rate by using strategic loan products in sequence with the optimal timing of payments.
- Debt to Income Ratio: The debt-to-income (DTI) ratio is a critical financial metric that measures an individual’s monthly debt payments against their gross monthly income. A high DTI signals to potential lenders that you are over-leveraged, which will often block your eligibility for new, more efficient credit products. Systematically lowering your DTI through the Velocity Banking process will often result in better offers on credit cards and lines of credit. Expect this to happen slowly, then suddenly if you stick to the plan.
- Credit Score: Similar to the debt-to-income ratio, your credit score can unlock your access to better, more efficient loan products and/or promotional offers which may greatly reduce the amount of interest paid over the year. Raising your credit score may also increase the amount of credit capacity lenders will extend to you with these more favorable terms. This increases your options when opportunity comes a knocking.
Step 6 - Building a Long-Term Financial Plan Using the Velocity Banking Method
Establishing a long-term financial plan through the Velocity Banking method hinges on creating a robust framework that not only facilitates immediate cash flow management but also paves the way for future financial stability and growth.
This begins with setting clear, achievable financial goals that span various timelines—short-term, medium-term, and long-term. Short-term goals could include building an emergency fund or paying off specific high-interest debts, while medium-term objectives might involve saving for a down payment on a home or funding a child’s education. Long-term goals should encompass retirement planning, wealth accumulation strategies, and estate planning.
Upon defining these goals, it’s crucial to integrate them into a comprehensive financial strategy that leverages the Velocity Banking principles to expedite them. This entails regularly reassessing and adjusting your cash flow management tactics to align with your evolving financial position and goals. For example, consider establishing a systematic investment plan that allows you to leverage any positive cash flow into growth-oriented and income-producing investment vehicles, such as brokerage accounts, cash value life insurance, rental real estate, and/or retirement accounts.
Velocity Banking vs. Infinite Banking: Are They The Same Thing?
Velocity Banking and Infinite Banking definitely share many commonalities, but they are by no means the same thing.
Velocity Banking: Began as a method to pay off a mortgage early, with its hub being a home equity line of credit (HELOC) as one’s primary expense account. The Velocity Banking method later expanded to using its monthly cash flow management principles towards paying down bad debt like credit cards and consumer debt. Although the same strategy can be applied to someone with free cash flow to build wealth, the focus of Velocity Banking has always involved debt elimination.
Infinite Banking: Started as a way of weaning dependence on traditional banks by using a Whole Life insurance policy as one’s primary savings vehicle and emergency fund. Policy loans against Whole Life’s cash value are prescribed when funds are needed for emergencies, investment opportunities, or household expenses. However, Nelson Nash (the originator of The Infinite Banking Concept ©*) states that “being an honest banker” by budgeting for repayment with interest is essential for success. Doing so allows your cash value to earn compound interest in a tax-free environment while paying simple interest on a flat or decreasing balance, as you can see in the video below.
Both Velocity Banking and Infinite Banking focus on alternative methods of cash flow management and repurposing traditional financial products to accelerate one’s path to financial freedom. Aspects of either can certainly be applied to create a more powerful result for anyone willing to adopt the complexity and discipline necessary for success with either.
Warning: Although our experts specialize in helping people become their own bank using Infinite Banking life insurance, I would caution those still laden in bad debt not to prematurely start a policy. Doing so would mean you are essentially financing your Whole Life policy using high-interest debt, and the cash value growth certainly cannot overcome that hurdle.
Instead, we recommend getting a cheap term life insurance policy while in bad debt, but make sure that it is a “convertible term policy” that is guaranteed convertible to an Infinite Banking Whole Life policy. That way, if you pass away prematurely, your family will have money left over after using the tax-free death benefit to pay off your debts. If you live, you can easily upgrade your term policy to a dividend-paying Whole Life policy without having to take another health examination. Your health rating from the term policy is guaranteed to transfer to the Whole Life policy even if your health got worse.
Overcoming Psychological Barriers to Alternative Debt Management Strategies
4 Common Fears and Misconceptions with the Velocity Banking Strategy
Many borrowers face intense psychological barriers (some imagined and some real) when it comes to considering Velocity Banking for their situation.
- One common fear is the misconception that using credit, even strategically, is inherently bad and always leads to more debt.
The cultural narrative which praises a “debt free” approach and shames any use of credit will often deter the most intelligent and disciplined individuals from a mathematically superior strategy.
- Another misconception is the belief that debt management plans are too complex or time-consuming to understand.
Unfortunately, this internal barrier often keeps borrowers trapped in a debt paradigm that may be simple to understand but impossible to overcome.
- Another prevalent fear involves the concern that velocity bankers can no longer spend to enjoy their lives with such an aggressive repayment regime.
When shifting from impulsive financial behavior to becoming fiscally responsible, Velocity Bankers often find a comfortable balance between saving for their “financial future” and spending for their “financial now.”
- Some view the act of borrowing against their house as a risky gamble rather than a calculated strategy for reducing the true cost of maintaining their household.
Velocity Banking is often the precursor to becoming your own banker, where one stops holding fragmented financial strategies in a vacuum and instead takes a holistic approach benefiting the sum of the parts.
A Mental Recipe For Overcoming Mental Blocks to Velocity Banking
It’s crucial to replace fictional fears with functional facts about both your current situation and proven abilities.
Here are a few questions to ask yourself that can immediately shift your mindset to make the velocity banking strategy work:
- Where have I been organized before? Or what facet of my life is well-organized TODAY? Perhaps it’s a particular collection you have or maybe a certain set of folders on your computer.
- When have I successfully navigated complexity in the past? What do I do on autopilot now that used to overwhelm me? Whether it’s making your favorite dish or learning to drive a stick shift, we’ve all had these sorts of transformations.
- What systems in my life now did I use to resist because they seemed so daunting? How many people used to pay bills manually (even by check) until they finally gave in and used bill pay? There’s probably some system in your life you resisted initially, but now couldn’t live without.
In addition to these mental shifts, perhaps modeling out a velocity banking example in the context of your precise situation can give you the confidence you need to execute on a more-informed decision-making process.
Final Thoughts on the Velocity Banking Strategy
Summary of the Velocity Banking Strategy
The Velocity Banking strategy is a way to systematically orchestrate the cash flows from one’s monthly income and expenses through an array of loan products repurposed to accelerate the path to debt elimination.
However, the discipline, skills, and tactics one learns to get out of debt using Velocity Banking could and should be applied towards building wealth with income-producing assets to achieve true financial freedom.
Is Velocity Banking Right for You?
Individual financial discipline is a crucial factor. Those who are committed to adhering to a structured repayment plan and are willing to actively engage in monitoring their financial progress are typically better suited to implement Velocity Banking effectively.
It is also essential to gauge your understanding and comfort with the underlying complexity involved. You must be prepared to educate yourself on the principles of cash flow management and loan mechanics, which will enable you to navigate the common risks of Velocity Banking.
Finally, assess your long-term financial aspirations. If your goals include not only debt elimination but also wealth building through income-generating assets, the skills cultivated through Velocity Banking can be invaluable. In conclusion, if you are disciplined, informed, and motivated to take control of your financial future, Velocity Banking may very well be the right strategy to propel you toward achieving your broader financial objectives.
John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA
Founder of BankingTruths.com
John “Hutch” Hutchinson has no affiliation or association with any of the following and does not feel compelled to do so since he is a published life insurance authority, policy design geek, and a multi-faceted accredited financial strategist:
- The Infinite Banking Concept®, The Infinite Banking Institute, Nelson Nash, nor his book Becoming Your Own Banker – Unlocking the Infinite Banking Concept
- Bank on Yourself, Pamela Yellen, nor her book The Bank on Yourself Revolution
* “The Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts Inc.
** “Bank On Yourself®” is a registered trademark of Hayward-Yellen 100 Limited Partnership.
