Step 1: Calculate the Cash Flow Index for each debt you carry.
This is where the rubber meets the road with the CFI. You’ll start by calculating the Cash Flow Index for each debt you carry. So, make a list of your debts, note what is currently owed on them, and include the minimum monthly payments required on each.
Once you have that information, you’ll calculate the CFI. To calculate the CFI, the loan balance is divided by the minimum monthly payments you’re required to make.
Cashflow Index = Loan Balance / Minimum Monthly Payments
The resulting number is what indicates how effective that debt is at the given interest rate and term. A high number—anything over 100—indicates that the loan is efficient. A low number—anything under 50—means that the loan is inefficient.
Step 2: Create a plan of attack for your debt.
Look over each debt to determine what to categorize each of your debts as—and, in turn, how to prioritize them.
Start with the destructive debt.
Debts with CFI under 50 are destructive to your wealth, so it’s important to get rid of that debt as quickly as possible. In other words, you’ll want to prioritize it—and the high interest or fees it comes with.
Destructive debt typically includes subscriptions you aren’t using, purchases resulting from overspending, purchases related to abusive practices, like drugs, alcohol, or habitual shopping, and debt that is incurring fees.
Determine what debt you can restructure.
But what if the CFI on your debt is between 50-99? This type of debt is neither efficient nor inefficient, but it is a possible candidate to restructure—and possibly eliminate.
If we’re talking about consumer debt, you’ll want to think about eliminating it. You may have the option to consolidate this type of debt on a credit card that offers a 0% intro APR, or with a loan offering an intro rate of 0% for a certain time frame.
You also have the option to pay it off ASAP. And, if the debt produces good cash flow, you can also renegotiate the interest rate to get the best term possible. For example, you can do this on a real estate loan.
Decide how to handle your efficient debt.
If the CFI on your debt is 100 or higher, the debt is operating pretty efficiently. When it comes to the debt in the most effective tier, you may want to think about leaving it in place until your other debts are eliminated or restructured—especially if it produces good cash flow for you.
You may also choose to outsource some of your effective debt to produce more cash flow for your bottom line—and, in turn, supercharge your wealth. Ideas that I’ve had success with in the past include renting out all or part of a home on AirBNB or VRBO, renting a camper on Outdoorsy, and renting a car on Turo.
CALL 281.605.0880 ASK FOR JOHN