A teacher in Portland wanted to retire in about eight years, and she wanted every debt gone before that day came. So I built her a Dynamic Banking plan and walked through it month by month. Dynamic Banking means your paycheck goes straight onto a line of credit, your bills get paid from that line of credit, and every dollar you haven't spent yet sits against the balance, cutting the interest you're charged each day. I built the whole thing on screen in a Dynamic Banking walkthrough for this Portland teacher, including charts of her daily balance.
These are rough numbers, since she didn't have an exact budget yet. She and her husband bring home about $7,500 a month after taxes. Their regular bills run about $4,000. I added another $1,500 a month for vacations and fun, because a plan you can't live with for eight years won't last eight years. That leaves $2,000 a month of cash flow, which means money left over after everything is paid.
The debts add up to $305,000. There's a truck with a $33,000 balance at 5% and a $505 payment. There's a trailer with a $22,000 balance at 4.5% and a $231 payment. And there's a mortgage with a $250,000 balance at 4.25% and a payment of about $1,230.
She didn't have a line of credit yet, but her credit is excellent, so I planned around a $25,000 line of credit at 6.25%, and I expected her real rate to come in lower. Rates move, so price your own before you copy any of these numbers.
Month one starts with a $12,000 chunk from the line of credit to the truck loan. A chunk is a lump sum you move from the line of credit onto another loan's principal. Her paycheck lands on the line of credit on day two. The mortgage payment comes out in the middle of the month. At the end of the month, the line of credit pays off her credit card, which she uses for everyday spending and pays in full so it never charges interest. She finishes the month owing $10,000 on the line of credit, down from $12,000.
A line of credit charges interest on your average daily balance, which means the average of what you owe across every day of the month. Her balance started at $12,000, fell below $5,000 once the paycheck landed, and climbed back to $10,000 by the end of the month. The average came out around $5,840, and the interest for the whole month was about $31. She moved $12,000 off the truck loan and paid $31 to carry it for a month.
Month two starts at $10,000 and ends at $8,000, with an average balance around $3,840 and about $20 of interest. Month three starts at $8,000 and ends at $6,000, with an average near $1,840 and under $10 of interest. Then she takes another chunk, $6,000 this time. The balance goes back up to $12,000, and the cycle starts again.
Why only $6,000 at a time, when she has $25,000 of credit? There are two reasons. First, the plan has no savings in it, so the unused $13,000 on the line of credit is her emergency cushion. Second, every one of her debts charges less than the line of credit. The truck is at 5%, the trailer is at 4.5%, the mortgage is at 4.25%, and the line of credit is at 6.25%. Moving a big balance from a cheaper loan to a more expensive one only pays off if your paychecks pull it back down fast. So the chunks stay small enough for her cash flow to clear in about three months. Chunking when the line of credit costs more than the mortgage runs that math in detail.
The truck is paid off in month 10. The trailer is paid off in month 17. The mortgage is paid off in month 89, which is about 7.4 years, before her retirement date. Interest on the three loans comes to about $49,500 in all. Making only the regular payments, the truck would have taken 77 months, the trailer almost 10 years, and the mortgage the full 30, for about $203,600 of interest. The difference is roughly $154,000 that stays in her pocket.
The line of credit isn't free. It adds somewhere between about $1,800 and $4,000 of interest over those 89 months, depending on how well she times her deposits and her bills. So the real savings land closer to $150,000.
Most of the speed comes from the $2,000 she sends at her debt every single month. The job of the line of credit is to keep that money working every day instead of sitting in checking, and to let her move it in chunks. Take away the cash flow and there's no plan. If her spending creeps up, the payoff date moves back with it, and the math works until spending creep breaks it explains why.
To run your own version, start with your take-home pay, what you actually spend including the fun money, and the rate on every debt you owe. For any debt that charges less than your line of credit would, plan on chunks your cash flow can clear in about three months, the way hers did.