Hello all, I'm new to the forums, but not to investing or saving. :-)
I'd like to back up Willowstudios here... Some of the posts seem to not follow the premise of the system. Most of the posters are under the assumption that these systems are "just a principal addition" scheme, hidden under fancy clothes.
The reality is that they are shifting interest. And shifting interest does what all interest does... It compounds. That's the "magic" that was discussed earlier.
The reason this can be more powerful than investing your discretionary income into the stock market is that your home interest rate is defined. When you decrease your principal, you're getting an 8% return on that investment. Sure, it's an "anti-investment" in that you don't get a check from your house, but instead get relief from having to make that payment later.
Take a $100k mortgage... If you leave the debt there and make a minimum payment, you're paying interest on $100k.
So, let's shift this a little. Let's get a HELOC, and put $5,000 from the HELOC to the 1st. Now we have a $95k first and a $5k HELOC. Still at $100k in debt, right?
So, here's where the "money shifting" comes from. Today, when you get your check direct deposited from work to your bank, what do you do with it? You let it sit until it's bill paying time. Or, you pay your bills early. Both are "smart" in the traditional sense, but we're not going the traditional route. How about direct depositing that income STRAIGHT to the HELOC?
So, for simplicity sake, let's say you get a once a month paycheck for $5k. NOW what you have is a $95k 1st, and a $0 HELOC. If you keep that balance for 3 weeks, and then pay your bills (out of the HELOC) in the last week, you end up with a $100k balance, but you didn't pay interest on the $5k for the 3 weeks.
That's how the system works. Sure, adding principal helps, and will compound the speed of this significantly... But it's not necessary. In my example you can see that I did not put anything to principal, and we had savings. My pea-brain can't figure out the amount, but I guess it's something like $30 for this $100k example. Plus, again... It compounds. As you countinue this your $30 stacks up to pay down that interest faster. (Can the guy with the graphing calculator help add some real numbers to this example?)
That's the basics... But that only saves the $5k for 3 weeks... What if we took this a little further?
You can kick this up a notch by sliding your interest payments further out! I know hardcore savers don't like credit cards, but they have one major bonus... A grace period! That's interest free loans, baby!
So let's take that $100k 1st, put $10k out of our HELOC to it, and we're back to a $90k 1st and a $10k HELOC. We direct deposit our $5k paycheck into the HELOC, and leave it alone. Now, put all your bills on a credit card, and keep them there (interest freeeeeeee) for 30 days, and when next month rolls around, put your next paycheck into the HELOC. Now you have...
A $90k 1st and $5k HELOC = $95k balance for 30 days.
A $90k 1st and $0 HELOC = $90k balance for 30 days.
At the end of this second month, you'll need to use that HELOC to pay back your credit cards (fully; don't want to pay interest on those purchases!)
Hopefully I've demonstrated that Speed Equity and other systems are not about principal paydown, but are about not paying interest by shifting the debt.
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