Suppose I asked you, “What’s the most important piece of financial advice you can learn?” What would you say?
My answer is, “Pay yourself first.”
Unfortunately, most people don’t pay themselves first. Instead, they pay financial institutions.
This is because most Americans are burdened by debt. Debt is a constant source of stress. It keeps us awake at night and stuck in the rat race by day. It makes financial institutions rich while eroding our wealth.
You want to get out of debt so you can reduce your risk, increase your cash flow, and have greater peace of mind.
But you’ve undoubtedly heard more than a few competing strategies about the best way to get out of debt.
In my first career—many years ago—I was a rocket scientist and designed jet engines. In that career, I learned the importance of precision, and how to use math to solve problems.
When I got into financial services, I applied the same principles to finance. I created a mathematical tool I call the “Cash Flow Index” that determines the most efficient way to pay down loans. It frees up cash flow, which then enables you to “pay yourself first.”
Then, you want to use the Rockefeller Method of protecting and growing wealth.
This is detailed by our friend Garrett Gunderson in his book, What Would the Rockefellers Do?
Get your free hardcover copy now to learn more.
If you’re determined to get out of debt, here’s the fastest, safest, and most sustainable way to do it:
1. Roll Non-Deductible Loan Interest into Deductible Loans
Assuming you have enough home equity and good enough credit, refinance your mortgage and roll as much of your non-deductible loans (credit cards, auto loans, etc.) into it as possible.
The tax deduction will increase your cash flow.
2. Roll Short-Term, High-Interest Loans into Long-Term, Low-Interest Loans
The goal is to minimize your interest payments and maximize your cash flow. Then, you can attack your remaining debt strategically, using your increased cash flow to eliminate one loan at a time.
CAUTION: Do NOT do this if you’re undisciplined and your spending is out of control. If you’re just going to charge your credit cards back up again, you’ll just sink deeper into debt.
3. Improve Your Credit Score
There are many companies and resources to help you do this. By increasing your credit score you get better loan interest rates. This lowers your payments and puts more money in your pocket.
4. Use the Cash Flow Index to Pay Off Loans
Here’s where the Cash Flow Index comes into play. You’ve minimized your payments and maximized your cash flow. You’re now prepared to focus on one loan at a time, thus creating the “snowball effect” until you’re completely debt-free.
Most advice is to pay off your loans with the highest interest rates first. My advice is to ignore the interest rate and use the Cash Flow Index to determine which debt to pay off first.
To determine the Cash Flow Index of any loan, divide the loan balance by the payment.
A high Cash Flow Index means your loan balance is high relative to the payment. A low Cash Flow Index means your balance is low but with a high payment. Knock out those high payments first and you free up cash to work on other debts.
Loans with a score of 0-50 are inefficient loans and should be paid off as quickly as possible. Loans that score between 50 and 100 are in the caution zone. Loans with a score of between 100 and 300 are efficient loans.
To determine which of your loans to pay off first, calculate the Cash Flow Index for each. Whichever one has the lowest number is the one you should pay off first.
For example:
Home Loan Balance: $228,000
Interest Rate: 7%
Monthly Payment: $1,665
Cash Flow Index: 137 ($228,000 ÷ $1,665)
Auto Loan Balance: $16,500
Interest Rate: 8%
Monthly Payment: $450
Cash Flow Index: 37
Credit Card Balance: $13,000
Interest Rate: 12%
Monthly Payment: $260
Cash Flow Index: 50
Student Loan: $107,000
Interest Rate: 3.9%
Monthly Payment: $650
Cash Flow Index: 165
In this example, it seems to make sense to pay of the credit card first because it has the highest interest rate. But the Cash Flow Index reveals that the auto loan should be paid off first.
The trick is to pay off debt that gives you the greatest cash flow with the least investment.
In this case, by paying off the auto loan first, you free up more monthly cash, which can then be applied toward the credit card balance. Paying off the auto loan first means you can pay off both faster than if you started with the credit card.
We were once working with a dentist who had multiple practices and about 15 different business loans. We calculated the Cash Flow Index on all the loans. Each of them scored less than 100.
We recommended a strategic consolidation of his loans. Instead of having 15, he went to one. And instead of having a combined Cash Flow Index score of 48, he had one that was 175. His payments went from $17,000 per month to $6,000 per month.
That’s a huge and immediate difference in cash flow! It literally took this doctor maybe a couple of hours of his time to consolidate and refinance these loans. We weren’t asking him to cut back, to cut out his entertainment costs or his restaurant enjoyment. We just showed him how to be more efficient with his debt.
This is the power of the Cash Flow Index system. It’s the best way to free up cash flow so you can pay yourself first and put more money back in your pocket.
Use a Rifle Approach, Not a Shotgun Approach, to Get Out of Debt
In my practice, most people I’ve seen use a shotgun approach to pay down debt. They don’t understand what to pay off, so they just throw a few extra dollars at each loan in their monthly payments.
I’ve seen many clients who had credit cards with very high interest rates, and they were paying $250 extra on their mortgage each month. Simply because that’s what they were told to do.
The Cash Flow Index gives you a rifle and a scope to see your target clearly. Use the Cash Flow Index to identify the danger zone loans that are draining your cash flow. Then attack one loan at a time.
This targeted approach is much faster and more efficient than the shotgun approach.
Start Paying Yourself First
As I said in the beginning, the most important financial advice I could give anyone is, “Pay yourself first.”
Getting out of debt isn’t the ultimate goal of using the Cash Flow Index. The ultimate goal is to free up cash flow so you can then start paying yourself first. If you simply spend your freed-up cash flow, then you’ll simply continue the cycle of debt.
If you have any loans with a Cash Flow Index of 100 or more, we recommend that you don’t make extra payments on those loans. Instead, recapture those dollars by putting into side savings account that we call the Wealth Capture account.
This account is focused on growing cash flow and improving the efficiency of your loans. It can be used for productive expenses like making investments or simply for storing your cash.
The best savings tool for your Wealth Capture account is properly structured, optimally funded whole life insurance.
- Free up cash flow using the Cash Flow Index.
- Use your increased cash flow to pay yourself first into a properly structured, optimally funded whole life insurance policy.
- Leverage the cash value of the policy to fund consumer loans. Pay yourself interest that would typically be paid to banks. You can also use your cash value to fund investments.
- Pay off your loans and continue reinvesting and generating more interest for yourself.
To learn more about this method of wealth building, get your free hardcover copy of What Would the Rockefellers Do?
This is a bestselling book written by our friend Garrett Gunderson. It details the financial system used by the ultra-wealthy to protect, grow, and pass on wealth.