Fractional Banking and the Velocity of Money: perfected by banks, but available to consumers to pay debts.
Fractional Banking is a banking strategy which allows banks to get rich. But I can show you, in concept how you can use this principle for debt reduction. You will need to seek out other references for Infinity Banking, but this post is to explain why you want to learn more.
Example of Fractional Banking practice.
Adam deposits $1000 in his savings account at the bank, at 1% per year or $10.
The bank is only required to keep 10% of deposits on hand. It can loan out the rest.
The Bank loans $900 of Adams money to Bob, at 10% per year or 90$ pay for 10$ cost.
Bob deposits the $900 dollars in his account at the same bank.
The Bank is only required to keep 10% or $90 in Bob’s account, $900-$90=$810.
The Bank loans $810 dollars of Bobs money to Charlie at 10%, that’s $81 per year.
Charlie deposits his $810 in his account.
The Bank is only required to keep 10% so $81, $810-$81=$729
The Bank loans Daniel $729.00 at 10% or $72.9 profit per year.
Daniel deposits his $729 in his account at the bank.
The bank keeps 10% or $72.9 in his account, $729-$72.9=$656.1
The Bank loans $656.1 to Eric at 10% and makes $65.61.
Eric deposits $656.1 in his account
The cycle continues.
The Bank got Adam to deposit his money for 1% interest.
The bank turned around and loaned 90% to Bob for $90, 9 times as much as they paid Adam and a $80 dollar profit. But it didn’t stop there; The bank made $81 dollars from Charlie, $72.90 from Daniel, $65.61 from Eric and this cycle repeats it self until there’s no more money to lend from Adams account. This is a simplification of Fractional banking. But it illustrates how the bank can make multiple loans and have multiple streams of income from Adams deposit, for which they pay him very little 1%, while charging 10% to loan out his money.
But this is legal and you can do the something similar with your debts and a simple line of credit.
You open an unsecured line of credit for $1000.
You pay the bank 4% interest.
You have a credit card from Adams grocery, you owe $500. This credit card has cash advances at 8% and zero % if you use a credit card check.
On the first day of the month you take $900 out of the unsecured line of credit and pay it to Adams grocery credit card on the first day of the month. That’s you monthly payment.
On the second day of the month you write a $800 credit check on your Adams credit card to your Bob’s gas card. Bobs card also has cash advances and credit checks at 8% interest.
On the 3rd day of the month, you write a check for $700 from your Bob’s gas card to your Charlie’s Department store credit card. This card has cash advance checks also at 8%.
On the 4th day of the month you write a check for $600 to Daniels Car Dealership to pay the monthly car loan on your two cars.
On the 5th day of the month you get paid, and you deposit $1000 from your paycheck into the secure line of credit. The remainder of your paycheck goes into your checking account for smaller bills the rest of the month.
You will notice, that we paid large principle payments, which reduces our interest, we left 100$ each time we moved money and ended up replacing the $900 we borrowed from the line of credit and paid an extra hundred dollars. This means we can pay our five debts by moving money and still eat, along with paying the line of credit we used to start this strategy.
You used the $900 from the secure line of credit to pay all your bills with money you borrowed and just kept moving from place to place. This is very similar to how the bank borrowed Adams money, to loan to Bob, then borrowed 90% of the money they loaned to Bob, to loan to Charlie and then borrowed 90% of what they loaned to Charlie, to loan to Daniel. This “movement of money is called the “velocity” of money.
Now, thus was an extreme example of the movement of money or money velocity. And, as you can see, this example requires you to be able to move money from Creditor to Creditor. Most revolving accounts allow you to write credit checks, but some won’t, so your payments to them need to be smaller. Some revolving debt cards could reduce your credit limit preventing you from moving the money. These are some of the variables you need to investigate. I don’t recommend this much movement when you first start, but this is to give you an idea of what is possible. Instead, for beginners using this strategy, use the unsecured line of credit to pay your bills and then deposit your paycheck in there to pay the amount due on the secure credit line and build extra credit in the line for next months payments. You should also read more references about Infinite Banking before trying it and start slowly and build up the number of accounts you cycle through.
Because there are serious consequences if the credit card issuer decides to reduce your line of credit after you made the large payment. If it occurred you have to use your paycheck to pay bills. So I suggest using accounts where you have only used one half or less of your credit line and your payments have been on time. You should also read more references about Infinite Banking before trying it. Instead, for beginners using this strategy, use the unsecured line of credit to pay your bills and then deposit your paycheck in there to pay the amount due on the secure credit line and build extra credit in the line for next months payments.
Now as you can see, this example requires you to be able to move money from Creditor to Creditor. Most revolving accounts allow you to write credit checks, but some won’t, so your payments to them need to be smaller. Some revolving debt cards could reduce your credit limit preventing you from moving the money. So a simplified version of this is just to use your line of credit to pay all your bills and replenish This is still an effective strategy
✍🏼 By Shortsegments