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Leakages and How They Hurt Part 1

Leakages Hurt HELOC by slowing the payout of Mortgage
Leakages are those outgoings that are paid for in cash and do not assist in the Home Equity Line of Credit process.
Paying in “Cash” includes anything that you do not put on credit card and thus prevents that cash being put against your mortgage.
If there is a first objection that arises when a client starts to adopt the HELOC philosophy it is that they have to have cash “in pocket’ for those miscellaneous expenses. This is realistic but you want to minimise this amount as every dollar NOT put against HELOC increases the interest accrued on the mortgage.
There are two types of leakages: Voluntary and Involuntary.
Voluntary is where you just do not want to use a credit card because it seems like such a small amount i.e. coffee at McDonalds, your morning newspaper, the sandwich at lunch.
Involuntary is where payments are taken direct from your bank account covering such things as lease payments, health care direct debits and general subscriptions.
Voluntary is the more insidious of the two. It is easiest to fix as you just have to change your behaviour. It is potentially the most damaging.
In our previous blogs we have debunked the myth of Offset accounts and proven that they are relatively ineffective. Now use our HELOC calculator and reduce your monthly input by an amount equal to the cash you spend directly which is “convenient” or does not make you “feel cheap”. Notice it adds months (and interest) to your mortgage. Quite a penalty to pay for the “joy” of carrying cash.
Working with clients, I have also found that they did not realise how much was going out. A daily lunch $12.00 ($3,000 a year), kids school lunches (2,500 a year), a few beers with the mates ($2,500 a year). It all adds up fairly quickly. (More on how to monitor these figures in later blogs.)
I have not used cash in over five years? How?
  • By using the credit card for all transactions and purchasing those tiny items at the right time. I buy my Saturday newspaper at the same time as buying my groceries so it is included in the purchase.
  • By realising that McDonalds, coffee shops and newsagents no longer pay the exorbitant credit card fees they once did and that any fee is already factored into the price.
  • By frequenting places that take credit cards instead of “backyard” operators that allegedly are cheaper. In reality they are running cash businesses at your expense.
Please do not get me wrong. There is no such thing as a perfect world and everything is relevant.
You may actually be saving hundreds of thousands of dollars using the HELOC system of reducing your mortgage and a few bucks a week may be a pain you can tolerate. But like the most addictive narcotic you can soon forget how much damage these “leakages” are doing.
Anyone who has gone to a gym (not that I have) will tell you that it is an effort and takes resolve to maintain the program. But once you get through the initial pain and inertia, your body starts to crave the results and abhors the lapses. This is the way to practise HELOC. When every fabric of your being is saying “Aw, just pay $3.70 for that newspaper. It does not hurt” pull out the credit card and offer it. When a “deal” comes up where you can pay $550 for cash or $600 on card, pump the details into the calculator and see that this deal will put you back $200 effectively costing $550 plus $200 interest equalling $750.
The habits are starting to develop.
One surefire way to ensure maximum HELOC benefits – SIMPLY REFUSE TO CARRY CASH.
You will see the benefits immediately.

Required Input

First Person Monthly Nett?
Second Person Monthly Nett?
Other Income Monthly Nett?
Monthly Spend?
Mortgage Pay Out?
Interest rate?
Mortgage Balance
Results

Pay Out Date
$4,000
Loan Term (Years & Months)
$4,000
Total Interest
$4,000

Next time – The Involuntary Leakages

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