{"id":141563,"date":"2022-01-28T10:09:58","date_gmt":"2022-01-28T17:09:58","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=141563"},"modified":"2023-06-09T12:33:52","modified_gmt":"2023-06-09T18:33:52","slug":"how-to-eliminate-your-debt-and-start-building-wealth-in-two-simple-steps","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-to-eliminate-your-debt-and-start-building-wealth-in-two-simple-steps","title":{"rendered":"How to Eliminate Your Debt and Start Building Wealth in Two Simple Steps"},"content":{"rendered":"\n<p>Some money gurus would have you believe that extreme budgeting, which includes tactics like reducing your grocery bill or car payment, is the key to financial success. While these tactics can be useful for freeing up some extra cash when you need it, the experts are missing the mark when it comes to eliminating the four horsemen that are far more destructive to your wealth-building.&nbsp;<\/p>\n\n\n\n<p>Paying interest on certain debts is one of these four horsemen\u2014but it&#8217;s important to recognize that not all interest is the same.&nbsp;<\/p>\n\n\n\n<p>The Dave Ramsey\u2019s of the world want you to believe that paying off all interest rate debt\u2014especially the highest-rate debt\u2014is the best possible decision for your finances. However, interest on debts that you can outsource to someone else\u2014such as with rental real estate\u2014can arguably be a productive expense. <\/p>\n\n\n\n<p>That said, other types of consumer debt, like credit card debt, which typically comes with high interest rates, isn&#8217;t quite the same. While passing along the interest costs on a rental property to a tenant can be productive, this other type of interest can&#8217;t easily be passed off to someone else to cover. As such, nearly all experts would agree that the interest you pay on consumer debt is generally destructive in nature.&nbsp;<\/p>\n\n\n\n<p>And if all debt and interest charges are not created equal, then you need a smart, math-based approach, like the Cash Flow Index, to help you make a decision on which debt\u2014and interest\u2014to eliminate first. Here&#8217;s what you should know about this approach.<\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_6483706e6817e: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_6483706e6817e\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/how-to-eliminate-your-debt-and-start-building-wealth-in-two-simple-steps', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/how-to-eliminate-your-debt-and-start-building-wealth-in-two-simple-steps',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/how-to-eliminate-your-debt-and-start-building-wealth-in-two-simple-steps', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">The Cash Flow Index<\/h2>\n\n\n\n<p>The Cash Flow Index system, or CFI, which is outlined below, is a scoring system that lets you identify how efficient each of your loans is. This system prompts you to pay off the most inefficient loans first before prioritizing the repayment order for your remaining loans, thus maximizing your results.<\/p>\n\n\n\n<p>This system has grown in popularity over the years due to the sheer practicality of tackling your payables from a cash flow perspective. It has also been touted by many anti-financial advisors, like Garret Gunderson and <a href=\"https:\/\/moneyripples.com\/\" target=\"_blank\" rel=\"noopener\">Chris Miles<\/a>\u2014and the concepts of this method are long-standing and proven. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Using the Cash Flow Index to Tackle Debt<\/h2>\n\n\n\n<p>The good thing about the CFI is that you aren&#8217;t guessing which interest rate might be best to eliminate. It takes a more scientific approach\u2014and yes, there will be math.<\/p>\n\n\n\n<p>Here is your two-step action plan for eliminating debt using the CFI:&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Step 1: <\/strong>Calculate the Cash Flow Index for each debt you carry.&nbsp;<\/h3>\n\n\n\n<p>This is where the rubber meets the road with the CFI. You&#8217;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.<\/p>\n\n\n\n<p>Once you have that information, you&#8217;ll calculate the CFI. To calculate the CFI, the loan balance is divided by the minimum monthly payments you&#8217;re required to make. <\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Cashflow Index = Loan Balance \/ Minimum Monthly Payments<\/li>\n<\/ul>\n\n\n\n<p>The resulting number is what indicates how effective that debt is at the given interest rate and term. A high number\u2014anything over 100\u2014indicates that the loan is efficient. A low number\u2014anything under 50\u2014means that the loan is inefficient.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Step 2: <\/strong>Create a plan of attack for your debt.<\/h3>\n\n\n\n<p>Look over each debt to determine what to categorize each of your debts as\u2014and, in turn, how to prioritize them.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Start with the destructive debt.<\/strong> Debts with CFI under 50 are destructive to your wealth, so it&#8217;s important to get rid of that debt as quickly as possible. In other words, you&#8217;ll want to prioritize it\u2014and the high interest or fees it comes with. Destructive debt typically includes subscriptions you aren\u2019t using, purchases resulting from overspending, purchases related to abusive practices, like drugs, alcohol, or habitual shopping, and debt that is incurring fees. <\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Determine what debt you can restructure.<\/strong> 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\u2014and possibly eliminate. If we&#8217;re talking about consumer debt, you&#8217;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. <\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Decide how to handle your efficient debt.<\/strong> 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\u2014especially if it produces good cash flow for you. <\/li>\n<\/ul>\n\n\n\n<p>You may also choose to outsource some of your effective debt to produce more cash flow for your bottom line\u2014and, in turn, supercharge your wealth. Ideas that I\u2019ve 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.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Final Thoughts on Using CFI to Eliminate Debt<\/h2>\n\n\n\n<p>When I started my financial independence journey years ago, I was confused about which debt to eliminate first. I was following the popular debt snowball approach, but I wasn&#8217;t making enough headway and was denied a loan\u2014despite having a 680+ credit score. <\/p>\n\n\n\n<p>After learning and implementing the principles above from <a href=\"https:\/\/moneyripples.com\/\" target=\"_blank\" rel=\"noopener\">my mentor<\/a>, I eliminated all of my consumer debt, restructured my mid-tier debt to free up cash flow, boosted my savings and credit score significantly, and became more attractive to a lender in a matter of just four months.&nbsp;<\/p>\n\n\n\n<p>Paying interest on debt out of your own pocket is a heavy weight on your finances and can drag down your wealth-building potential\u2014which could even keep you from securing your next property loan. What actions will you take to effectively reduce or eliminate this \u201chorseman\u201d from your portfolio?<\/p>\n\n\n","protected":false},"excerpt":{"rendered":"<p>Debt and interest charges are not created equal. As such, you need a smart, math-based approach, like the Cash Flow Index, to help you make a decision on which debt\u2014and interest\u2014to eliminate first. Here&#8217;s what you should know.<\/p>\n","protected":false},"author":214306,"featured_media":141585,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5182],"tags":[7309,7307,7308,2526,7295],"class_list":["post-141563","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-personal-finance","tag-build-wealth","tag-debt-strategies","tag-eliminate-debt","tag-personal-finance","tag-real-estate-debt"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/141563","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214306"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=141563"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/141563\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/141585"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=141563"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=141563"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=141563"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}