In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Adam Carroll, Founder of The Shred Method™, a fintech software company that creates behavior change for people who want to blast away debt, build wealth, and achieve financial independence. Together, they discuss helpful tips for debt management and wealth creation.
In this episode, you will learn:
- Everything you need to know about The Shred Method™.
- How home ownership can be used as a tool to build wealth.
- How to use a HELOC as a cash flow technique.
- How to make your income more efficient.
- And more!
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show, I brought on a special guest, Adam Carroll. Through the use of The Shred Method, Adam paid off his home in record time, saving over $180,000 in interest in the process. He’s here to share his strategy with us, in an effort to help people “free themselves to be themselves.”
Adam has published four books and produced an award-winning documentary on student loan debt. More than financial freedom, Adam is all about helping people achieve time freedom, relationship freedom and service freedom. Adam, welcome to the show.
Marc, thank you so much for having me. It’s an honor to be with you.
Great. I’m looking forward to speaking with you today. With the market’s all over the place and inflation running so high, more people are trying to get in tune with where their money is going and how they can improve their financial situation.
I couldn’t agree more, Marc. There’s so much uncertainty in the market right now. We’re facing what could be a year to five years of somewhat sideways market fluctuations. When this happens, people always worry. What do you do? Where do you put your money? How do you get the most efficiency from your income? I think The Shred Method™ is a rock solid way to do that.
Can you start off by explaining what The Shred Method™ is?
What is The Shred Method™?
Aspects of The Shred Method™ are known in a variety of different terms. Some people may have heard it as velocity banking, some people call it mortgage acceleration, some people call it an Australian mortgage. Effectively, what we’re doing is we’re creating interest rate arbitrage by using a home equity line of credit as a checking account. So your money literally gets deposited into a HELOC.
The Shred Method™ itself is driven by a piece of software that’s written on a fairly complex algorithm which ensures you’re gaining the maximum use of your income on a biweekly or monthly basis to save the most amount of interest possible.
Okay. Can you walk us through an example? Let’s say someone has a $500,000 mortgage. How do they start using The Shred Method™?
Well, if you’re buying a $500,000 home, there’s a certain amount of income that you have to make in order to be approved for that loan. So we look at your front end debt-to-income ratio and your backend debt-to-income ratio. The front end being your mortgage, the backend being all of the other monthly bills that you pay. That could be a car loan, student loan, credit card debt, etc.
So someone that has a $500,000 home is making more than enough money to cover that particular debt, and generally they have some discretionary income leftover. Some people move that discretionary income into a checking account, a savings account, or into investments. But candidly, the majority of people’s discretionary income end up going to Costco, Target, or dining out.
So let’s assume that a homeowner gets paid every two weeks, and their income is more than enough to live on for that two week period of time, meaning they’re going to have discretionary income. The Shred Method™ basically says if you deposit that discretionary income in your home equity line of credit (HELOC), you will bring down the balance… and the system will tell you how much of that extra you’ve brought down can be deployed against amortized or compound interest debt. So mortgages, student loans, credit cards, car loans, etc.
The end result is that your income becomes more and more efficient. It’s not just sitting in a checking account or a savings account, earning a quarter of a percent (if you’re lucky). It’s actually being deployed against debts that are $300,000-500,000 large on, it could be 3%, it could be 6% at this point in time, but the overall amount you’re saving is far more than you’re paying in interest on the home equity line of credit.
Does someone have to take out the HELOC at the time that they buy their house, or can this method be done at any point in the mortgage?
When to Implement The Shred Method™
It can be opened up at any point in time. However, it’s most efficient to use The Shred Method™ at the beginning of your mortgage. Some people will call us and say, “I’ve got a 30 year fixed mortgage and I’m 17 years in. Will The Shred Method™ save me money?” The challenge there is you’ve already paid the majority of the interest on the mortgage, so you’re not going to experience the level of savings that you would’ve earlier on.
But if the mortgage is a year to five years old, The Shred Method™ will absolutely save them tens of thousands of dollars in interest. In some cases, the savings could even be hundreds of thousands of dollars.
So if I understand The Shred Method™ correctly, when someone purchases a home, they take out a HELOC. Then, based on the algorithm of the product, they put money into that HELOC (and other debts) biweekly. The theory then is that, over time, they’re optimizing and minimizing the amount of interest they pay. Is that correct?
Yes, you nailed it. I would add that the technology tells you when to make the lump sum payments as well as how much the payments should be, down to the penny. So constantly, through the algorithm, the technology is factoring in how much interest you’re spending on that compound interest debt or amortized debt, versus how much income is flowing through that HELOC at any given point in time to minimize the amount of interest that you’re paying on the HELOC throughout the month. This is where that arbitrage is created.
I often ask people, “Would you pay $5 in simple interest to borrow $100 dollars if you knew that it would save you $2,000 in compound interest?” We just do that over and over and over again until the point where you realize just how little you’ve paid in interest on a mortgage and how much liquidity you now have access to through the HELOC.
Makes sense. When you were explaining The Shred Method™, you mentioned this is all made possible through discretionary income. But there’s bound to be times – maybe a month, maybe a couple – where there’s no money left over. Does that break the algorithm? What happens in those cases?
That’s a great question and one that comes up quite a lot. How many months out of the year do I have to have discretionary income before this plan implodes on itself? Candidly, the answer is that so long as you are money ahead – you have more income than expenses – about 8-9 months out of the year, the system will work optimally.
If you overspend on a given month, the system will slow down and probably even stop the suggestions to make lump sum payments, in an effort to get you back on track. It has its own breaking mechanism in the software.
Are you able to quantify the benefit of using this tool, or this algorithm?
Yes, we do quantify the amount of interest that an individual will save. Our system can also quantify how quickly you’ll be out of debt, if that’s your goal. Furthermore, it’s calculating what your investments at the end of this process could grow to based on a very conservative amount, which is essentially the amount of interest you are paying on your mortgage.
I find that stories are a great way to illustrate how this works, so I’ll tell you one. A gentleman named David submitted a form on our website on a Saturday. I was traveling, in a hotel room, when I saw the submission. But I responded to him right away. I said, “Hey, can we talk tomorrow morning? I’ll run your numbers for you.” So the next morning, I spoke with this gentleman who happened to be a United States Postal carrier. With him, I walked through his actual scenario and I asked, “David, just out of curiosity, what is your goal here?” He said, “My goal is to retire early. I’m just not sure I’m ever going to be able to do that.” I said, “Well, what would make it easier?” He said, “Well, my mortgage is my largest expense. If I didn’t have that, I’d be able to retire much faster.”
So I ran his numbers through our system which found that David would be able to pay off his home in 2.6 years, based on his income and current expenses. I remember David saying, “I’m getting emotional here. Do people usually get emotional about this?” And I said, “It’s an emotional thing. But this isn’t magic, it’s math.” It’s true: we’re just using the mathematical principles of blasting away debt based on your income.
That’s awesome. Earlier you mentioned investments. I know the focus of The Shred Method™ is to blast away debt, but does it also include useful information for investing, like recommending a percentage of an individual’s discretionary income being put toward an investment portfolio?
Yes. We will often run scenarios with people that will identify how much they’re already putting towards Roth IRAs, 401ks, SEP IRAs, etc. And we’ll ask them, what kind of a return have you seen over the last 5 or 10 years? We’ll plug that in as an average number. And then we can show them, here’s the delta between continuing to do that and/or maybe diminishing that by a $100-$200 using that as Shred money. How fast could you be out of debt, and how quickly could you be contributing far more to 401ks or Roth IRAs to get you to where you want to be that much quicker?
So we have a really great projection tool that shows how someone can blast away debt and build wealth in the most effective way. That’s what I think we’re all after in the investment world.
Yeah. One of my favorite books is The Value of Debt. It’s interesting because some people shun debt and are so against it. But not all debt is bad. As you’re saying, there’s ways to use debt to compound wealth and get financial freedom.
Related: “Good Debt” Versus “Bad Debt”
I can see someone using The Shred Method™ for student loans, credit cards and mortgages. But I think it can also be a solution for someone who wants to maximize their wealth as well.
Yes, this is an area of The Shred Method™ that I love talking about. People think it’s all about shredding your debt, and why would you ever do that? The reality is that I look at my home as a tool for wealth building, and here’s why.
Home Ownership As a Tool to Build Wealth
As you mentioned in the introduction, I paid off my house and saved $180,000 in interest. Now, I’m actually working on paying off the third house in nine years. What we do is we blast away the mortgage and redeploy the money (which is typically in the tune of $200,000-$300,000) towards investments that churn a monthly or quarterly passive income. Right now, we’re doing a lot of real estate syndications, which we run through a whole life insurance policy – the infinite banking method – so we double dip there, too.
But every time we redeploy the funds into an investment, it allows us to refill the bucket that much faster because we have more income coming in. In all the while, we’re minimizing our expenses on a monthly basis.
So for folks that just have one mortgage, what I would tell you is there’s a way to use The Shred Method™ to leverage some of your income into investments, like syndications or the stock market.
Yeah, you make a good point. Your house really is an asset, and you don’t have to sell it to use it – you can leverage it. There’s different ways to do it, but what you’re talking about makes total sense.
Right now, interest rates are going up, which can have a big impact on homeowners with mortgages. With rising rates, I think there’s even more value to implementing The Shred Method™, but does it make it harder for the method to work?
Where it makes it harder is the way we’re borrowing money on the line of credit. Because the cash flow lines of credit generally are going to be a variable rate. It’s typically going to be prime plus, 0.7% or 0.1%. So right now I’m seeing HELOCs at the 6.2% to 6.5% range. And if we can get a lower HELOC, then all the more power to us.
I’ve got a credit union nearby that’s offering a 0.99% introductory interest rate on a home equity line of credit. And they’ll lock it for 12 months. Now clearly they are trying to buy wallet share – they want new business – but that’s a great rate. If you just got a $500,000 mortgage at 6%, and you could get a 0.99% HELOC, I’d do that all day long. And we would save massively for 12 months. And even if you did it for 12 months and then you shut down Shred, you’d still save tens of thousands of dollars in interest in that first 12 month period.
Your question, is it getting harder? It is, but we’re still seeing major savings. It’s just at a different level from 3% to 6%.
Makes sense. You mentioned earlier that this can be an emotional experience. On the topic of emotions, I come across some people who are emotionally attached to their money – they want to see a specific cash balance in their checking or savings account day in and day out. How would you go about talking to someone like that? How would you show them that using that cash toward The Shred Method™ is a better approach?
Here’s what I would do… Let’s say someone had $50,000 sitting in a money market account. I would say, “Hey, can you do me a favor and pull out your statement on that account from last year? How much interest did you make on that money?” They’ll take a look, and let’s say they made a quarter of a percent for the year. That’s not nothing, but it’s close to nothing.
Then I’d say, “Now let’s pull out your mortgage statement. How much interest did you pay in the last year?” They’ll take a look and show me the number. Next, I’ll say, “If the money is sitting in the money market account, how does it make you feel?” Usually, they’ll say, “Safe and secure. I know it’s there, and I can access it any time.” To which I’ll follow up with, “Did you access it last year?” It’s more than likely that they’ll say “No.” I’ll say, “Well, let me show you what would’ve happened if you deployed some of that money (even half of it) to your mortgage.”
Using the numbers from before, if you had a $500,000 mortgage and you put $25,000 down, your balance would be $475,000. But you’d go from payment one at $500,000 to payment, say, 40. That means you skip three to four years of payments to get to that point.
Well, let’s say it’s four years of payments and the interest on those payments were $1,000. That’s $48,000 in interest you just skipped by putting $25,000 down on your mortgage. And by the way, because you had a HELOC, you still have access to that money.
There’s a big difference between availability and access. Available money is sitting in a money market account. Accessible money is sitting in a HELOC. Available money makes you none. Accessible money might cost you if you use it, but it saves you if you don’t.
Now, I think having money in case of an emergency is smart. It could help in the event of a job loss or an unexpected expense. But I know a lot of people that keep an excess amount of money on the sidelines… unfortunately, today, that’s like an ice cube melting on your countertops. It’s idle.
Yeah, I’m with you on that. Now this may be a more difficult conversation to have with people… What do you say to someone who wants to use The Shred Method™ but says they have no discretionary income?
How to Make Your Income More Efficient
This is an element of the coaching that we offer to the people we work with. From time to time, we’ll meet with folks who have more expenses than they do income. The way we like to put it is, they have more month at the end of their money, not more money at the end of their month. For The Shred Method™ to work – and for them to be financially solvent and ultimately financially free – you have to play really good defense and really good offense.
Playing good offense means we need to increase your income. So we might ask them:
- Have you asked for a raise recently?
- Is there anything you can do to pick up extra shifts at work?
- Can you add another stream of income?
On the defensive side, we’ll go through all expenses and determine which are errant. So we might ask them:
- Are you spending too much on dining out? (This tends to be the biggest issue for most people)
- What’s the convenience fee you’re paying for some of these products or services?
Believe it or not, conveniences like DoorDash can make up 10-20% of some people’s monthly budget. Our goal here is to try to shift their behavior and limit some of the issues in their spending.
Then we’ll get into some simple, yet often overlooked things like:
- Can we reprice your homeowner’s insurance?
- Can we reprice your renter’s insurance?
- Can we reprice your car insurance?
- Can we renegotiate or recast your car loan?
I always say that our team is ninja level at uncovering ways to save money and then ideating with you about how to create more income.
Awesome, thanks for sharing some of those strategies with our listeners. Adam, we’re just about out of time. I want to thank you for being on The Agent of Wealth Podcast. Thank you for explaining The Shred Method™ and for providing great tips for building wealth. How best can someone reach out to you to find out more about what you do?
The best way to find out more is to go to theshredmethod.com. If you have questions, or you’d like to go through more of a formal presentation, a 20-minute call often is all it takes for us to run your numbers and provide a savings analysis. The best way to do that is on theshredmethod.com, or you can email us at [email protected].
Great, we’ll link to all of that in the show notes. Adam, thanks again for being on The Agent of Wealth Podcast. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.