How to Use the Cash Flow Index to Pay Off Loans
The order you pay off your debt can have a huge effect on your financial safety, security and wealth creation potential. That’s why the Cash Flow Index works so well. It identifies your payments from a cash flow perspective first so you can systematically eliminate debt quickly and safely to increase your cash flow now.
The Cash Flow Index (CFI) is a scoring system to help you identify the efficiency of each of your loans. It allows you to pay off the most inefficient loans first. It then prioritizes the repayment order of all remaining loans to maximize your results.
To determine the Cash Flow Index of your loans, take the loan balance and divide it by the minimum monthly payments:
A high number (over 100) means the loan is efficient. A low number (under 50) means it's inefficient. The loan has the lowest CFI number is the one you should pay off first. It doesn’t matter what the interest rate is on the loan. The most important thing is how efficient it is,which is what the Cash Flow Index measures.
For example, let’s say you have the following loans:
Home Loan Balance: $215,000
Interest Rate: 7%
Monthly Payment: $1,569
Cash Flow Index: 137 ($215,000 ÷ $1,569)
Auto Loan Balance: $16,500
Interest Rate: 8%
Monthly Payment: $450
Cash Flow Index: 37 ($16,500 ÷ $450)
Credit Card Balance: $8,000
Interest Rate: 12%
Monthly Payment: $160
Cash Flow Index: 50 ($8,000 ÷ $160)
Student Loan: $45,000
Interest Rate: 3.9%
Monthly Payment: $272
Cash Flow Index: 165 ($45,000 ÷ $272)
Investment property Loan Balance: $70,000
Interest Rate: 5.5%
Monthly Payment: $2,800
Cash Flow Index: 25 ($70,000 ÷ $2,800)
It may seem to make sense to pay off the credit card first because it has the highestinterest rate, however strategists for the wealthy have discovered that ignoring theinterest rate and using the Cash Flow Index gives the best results, which means yourmoney is being more effective. By paying off the most inefficient loans first, those with a CFI = 0-50 (in this case: Investment Property Loan then the Auto Loan), you free up morecash flow to work on other debts. This has a “snowball” effect of eliminating them in order,in the most efficient way.
Once you’ve payed off your inefficient loans (those with a Cash Flow Index under 50), it’s time to look at the rest of your debt. Any loan with a CFI between 51-100 is a good candidate for restructuring. You may be able to renegotiate a lower interest rate, lengthen the amortization schedule, or consolidate the balance into a more efficient loan.
Any loans with a CFI score of 100+ are cash flow efficient. There’s really no need to be paying more than the minimum monthly payment on them. In fact, trying to pay down efficient loans (like making double payments on a home mortgage with a high CFI) instead of saving or investing that money could negatively impact your cash flow.
Once you have all your inefficient loans payed off or restructured, you have the availability to take advantage of any new investment opportunities with the freed up cash flow.