Fritos, Second-Hand Shirts and Used Jeans

There are anomalies in finance that are counter-intuitive to the strict functioning of mathematics. I’m not saying putting a dollar sign to the left of a string of numbers changes the way those numbers add up. What I am saying is that rules, protocols and laws can change the allowable manipulations. Let me illustrate.

When I was a kid among five in two sets of cousins sharing duplexes, one of our favorite activities was walking to a corner market a few blocks away for candies and soda. How I loved buying a bag of aromatic, crunchy, salty Fritos, 5¢ in those days. My older girl cousin and I would stroll back to our front porch, hoping to have some of our treats remaining to enjoy as the warm Texas dusk closed in around us. Five cents, or 10¢, 25¢–whatever we had—was real money, and by giving it to us, our parents were helping us understand “spending” and “all gone.”

Our parents themselves experienced the “all gone” symptom near the end of every two weeks—or whenever they got paid. Two single moms working to keep food on the table and clothes on our backs. Fortunately, the five of us kids were staggered in age, and therefore in clothing size. My brother, then a girl cousin, then me, then a boy cousin, then another girl cousin. Jeans and shirts went back and forth between the two families as regularly as summer growth spurts.

It is the first of these two financial principles that keeps CPAs (certified public accountants) broke. Not all of them, but many whom I talk to and many more whom I hear about. The first principle is this: money is finite. You have it, invest it, shelter it, save it or spend it—take your pick. Buy your Fritos and the money is gone.

The second principle is repurposing the same money over and over. Like one delicately woven white-on-white short-sleeved, open-collared shirt that was first my brother’s when he was about six or seven. I loved its softness and bright, sharp look when it was mine. I hated passing it to my smaller cousin, and finally watching the baby of the set get it. At least four of us used it, possibly all five.

That is what equity cycling can do for your finances. “But how can borrowing money to pay off a loan make sense?” one critic cries. “Borrowing at a higher rate to pay off a lower rate just doesn’t add up,” chime many CPAs. The critic doesn’t have a background in finance; the CPA does.

In paying on a conventional mortgage, the money you pay in cannot be withdrawn at a later date from that mortgage account. However, banks invented “sister accounts,” tied to the same asset that secures the first mortgage, namely your home. Your home belongs to the unpaid balance on the mortgage loan. The paid-for portion of your home, the amount of the mortgage that has been paid off plus home improvements plus increased property values are all tied to the sister account: the Home Equity. There are two ways to withdraw cash from home equity: a loan or a line of credit.

It is the revolving home equity line of credit that allows us to pass money from one destination to another to another, just like the little white short-sleeved shirt that rotated between two families and clothed their several children.

With a Home Equity Line of Credit (HELOC), it is possible to write a check (to anyone, even to yourself) or to make a cash withdrawal or cash transfer to another account of yours. Therefore, it is feasible to put money into it and take the same money out of it a few days later. While the cash was in the account, it lowered the balance due, and therefore the interest accrual, regardless of the higher interest rate.

For example, you can withdraw cash from a HELOC, pay a sizable chunk on your mortgage, repay the HELOC with your pay checks and savings, and withdraw cash again to pay the bills those paychecks were designated for. Because of the daily balance shuffle and the smaller amount of money you’re dealing with, the savings on your mortgage at 6% far surpasses what you spend for a few months on a HELOC at 8%.

It doesn’t sound right on the surface, does it? And that’s where not only CPA’s get off the track, but tens of thousands of ordinary people who won’t take the time to work out the numbers to experience how much smaller fractions are than whole numbers (to simplify). If your HELOC were 12%, and you used it for three full months before paying it back, your total interest charge would be only 3% of your average daily balance.

This is the same principle that the increasingly popular Money Merge Account selling for $3500 in a multilevel marketing structure friend-to-friend by representatives of United First Financial uses.

However it is not necessary to have expensive software – or any software for that matter – to use equity cycling for yourself. You have real property that’s paid for (your equity); you repurpose it for an advantage (loan your shirt to your cousin), then take it back when you seek a different advantage (to give to your little sister).

It’s as easy as sharing clothes, and more fun than a bag of Fritos. If you’d like to review a do-it-yourself manual on this style of equity cycling, please consider Let Your Mortgage Make You Rich! The advantage to you in the simple 86-page manual is you will understand financial principles  you can employ on every major purpose or investment for the rest of your life.

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