What debts should be paid off first?
Most people have this problem when it comes to debt. Like most people, you have a substantial amount of debt and do not know where to begin. You can always try the Cash Flow Index (CFI).
To figure out your index number, divide the total balance of the loan by the amount of the minimum payment. The resulting number is your index number.
Most people go by interest rates, but when you use the CFI, it may help you get out of debt faster.
For instance, Joe has $49,000 of debt.
His car balance is $14,000 and his (min. payment is $700)
His credit card debts are $4000 (min. payment $80)
His personal loan is $3000 (min. payment $300)
His student loan is $27,000 (min. payment $100)
His payday loan is $1000 (min. payment $150)
What debt should Joe pay off first to increase cash flow?
He should pay off his payday loan first. So instead of going from highest interest or small balance first go by your CFI number.
Now, you may ask how I came to that conclusion.
His payday loan balance is $1000 and if you divide 1000/150 = 5
(this is his index number)
This debt should be paid off first because it’s the lowest number of all his debts.
His car loan would be the next balance to attack
$14,000/700 = 20
Next would be his personal loan
3000/300 = 30
Then his credit card debt
4000/80 = 50
Finally his student loan
$27,000 X $100 = 270
The lower the index number, the higher the priority.
For instance, your mortgage is most likely to be the highest index number, therefore it should always be last to pay off.
A cash flow index number below 50 is deemed important.
So with the payday loan being a 5, it will be the very first priority.
If you go in order by CFI, his debts will be listed from first priority to last:
1. The payday loan (5)
2. The car (20)
3. The personal loan (30)
4. The credit card (50)
5. The student loan (270)
The higher the index number, the less cash flow you will have. In order to have more cash flow, pay off debt starting with the lowest number.
If you looking to have more cash flow, you may want to go by this index. I know most experts will strongly suggest that the highest interest debt should be paid first because it’s expensive debt. But if you want to have more money, the CFI is your method.
September 30th, 2009 at 11:58 am
Right now, I only have my student loan debt left
My struggle is figuring out if I should pay that off first, or build a strong Efund, or RRSP portfolio ect.
September 30th, 2009 at 12:00 pm
You only have student loans, I have credit cards and a car loan. According to the model
My credit card should be paid off first
October 1st, 2009 at 4:30 am
This is one way to tackle debt. I think the most important step is to decide that you want to pay down debt. Which debt to hit first is probably not that important. If the CPI method works for somebody, by all means use it. – That's my take on the different methods of paying down debt.
October 2nd, 2009 at 1:32 pm
@MoneyMonk did you use this to bring down your debt?
I am going to try this
October 2nd, 2009 at 1:36 pm
i guess my biggest issue/question is do you pay off debt first before trying to save?
Nobody can seem to give a str8 answer to this..
October 2nd, 2009 at 1:40 pm
Yes! I did that with a personal loan and a car loan
I never had credit card debt.
That works if you want to free up cash flow.
I saved first, then I paid off my debts
October 2nd, 2009 at 4:02 pm
I agree with you! Pay Day Loan first.