How would you like to pay off your loans FASTER and SAFER than other conventional debt paydown strategies?
How was I able to pay off over $900,000 in just over 3 years?
Chris Miles shares with you his secret weapon towards paying off debt faster – The Cash Flow Index. This formula will drastically improve your life, simplify your finances, and get you results faster!
Chris Miles Bio
Chris Miles, the “Cash Flow Expert,” is a leading authority showing entrepreneurs and their spouses how to quickly free up and create cash flow and lasting wealth TODAY spending time doing what they love most! He has been featured in US News, CNN Money, Bankrate, interviewed internationally on TV and radio, and has a high reputation with his company, Money Ripples getting his clients fast, life-altering financial results.
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Cash Flow Index – Biggest Secret to Paying Off Your Debt
As you can tell, I almost sound like I’m my own guest in this episode. I’m tone low or something. Like I drank a little too much of that funky cold medina. That brought back memories. Anyways, this is what happens when I speak all weekend. I spoke for a big group. I had a lot of fun speaking to some people that were getting back on track for prison and things like that. It’s very fun. You folks have to be the benefactors of my whole face. I want to remind you to check out our website www.MoneyRipples.com. Check out those blogs. There are podcasts of our other shows as well. You can check on iTunes.
There are events coming up. There’s all kinds of great information, materials, and programs that you can give take advantage of, so you can get to understand your money, especially if you are in business. There’s some amazing stuff for you right there. Check out our site. In this episode, I want to talk about the real secrets I have been able to apply in my life that allow me to pay off over $900,000 of debt in over three years. This has also helped many of my clients.
I’ve mentioned that up to this point, in the last couple of years, my clients have been able to save at least $50,000 million or $60,000 million. The money they would be able to gain from you doesn’t need to be able to pay off loans and pay off and get a much better cashflow rate of return on their money. I want to talk about this formula that we refer to as the cashflow index. Let me give you some backstory on this. As I mentioned, I paid over $900,000 of debt in about three and a half years.
Now, this great recession. I was in a $16,000 each month, where I was way upside down and way more expensive than having an income, both for my business and my personal life. I remember in 2008. I was struggling to figure out how to get out of this. Remember, that money I had was dwindling. I was trying to figure out what would be the best thing to do. I started to look at even the money that I did have or the money I could obtain. I could either go in and try to do an investment.
Maybe I buy an investment property and make some cashflow but I knew that wasn’t guaranteed either. I knew that it was situational depending on taxes. I started looking at my loans. Look at what many people refer to as debt but I’m going to refer to these as liabilities for loans because that’s the true term you would use here. I was looking at my loans and thought, “What’s going to help me the most? What can I do to use at least amount of dollars to create the most cashflow every month because I’m hurting?”
That’s when I created this formula referred to as a cashflow index. In fact, I was even in the game cashflow one night, and it let me, I was like, “There’s a rate of return. A guaranteed rate of return when I pay off loans.” I wanted to create something simple versus trying to create a monthly or a yearly rate of return on loans. I created something that was simple.
In fact, my friend Dale Clark even said, “I should call this a trick all the way into 2009.” I remember this in 2009, how my friend, Dale Clark, said, “I have been teaching the formula you have been giving to people. I call it the cashflow index. Are you cool if we called?” I said, “That sounds awesome. Sounds great.” From that point on, he starts using this cashflow index from about the summer of 2009 on whereas purchase cashflow index. We started teaching it back in early 2009.
The formula is simply this. You take the balance of your loan. Whatever you owe on this loan is divided by the minimum monthly payment. Not the actual monthly payment but the minimum monthly payments. The number you get is referred to as a cashflow index. The lower the number, the more you want to pay it off. The higher the resulting number or, the higher the index, the more you want to not get off.Many people get stuck calculating numbers but fail to realize that life was never meant to be put in a calculator. Click To Tweet
For example, say you have a $10,000 car loan that you are paying $500 a month on. You also have a $10,000 credit card that you are paying $200 a month on. Now, if you asked anybody, especially financial people and financial advisors are the pundits out there. They will tell you if all you had was $10,000, you can only be off one. It would say, “Pay off the credit card,” every time, especially if it’s a high-interest rate. They say, “Pay off that credit card. Get rid of it.” You do the debt snowball method where you put that payment that you save and put the other one.
Ignoring The Interest Rate
In this case, with a $10,000 car loan and that $10,000 credit card, you would pay off the credit card and save $200 a month. You put that $200 now onto the car loans. You would be paying $700 a month for that car. Here’s where we differ. I say, ignore the interest rate. Do not get sucked into paying off the highest interest rate first. Do not get sucked into only paying the lowest balance first. That’s not always true either. You want to pay the one where you put the least amount of dollars to get the biggest amount of cashflow freed up every single month. In this case, I would rather pay off the car loan because now we free up $500 a month.
When you free up $500 a month, this gives you options. When you free up more cashflow, you have more options. This means that you could take that $500 a month. Now, I buy onto that credit card that’s $200 a month and pay $700 a month to that credit card. Within about a year or so, you will have that sucker paid off if that’s all you pay. Some people will say, “Chris, the interest we pay will be obscene.” The reality is, no. It will not be. If you ever calculate how much interest you pay, it’s not that much.
It might be more than the car loan but here’s what I’ve realized. Many people get stuck calculating numbers but they fail to realize that your life was never meant to be put into a calculator. You cannot calculate what happens in your life. You want more freedom and flexibility in what you are doing in case something happens unexpectedly because nothing ever happens unexpectedly in life. We want to pay off the one that frees up the most cashflow with the least amount of dollars. When you do this, what happens that, say, for example, your income drops? Maybe you get laid off if you are working a job.
What would you rather keep paying on? Would you rather keep paying on that $500 car loan? Would you keep paying on that $200 credit card? If you had to choose which one would you rather pay when your income is lower, you would rather pay a credit card. This is a mistake I made personally in the beginning then, when I learned this, I realized, “It creates more freedom because then you’ve got that $500 carpet is gone. That means you don’t have to pay for a month versus $500 months of the car.
There’s also a lot more flexibility because sometimes, you may want to put that money towards your business. You may want to put it towards investment or something like that that will pay you more than what the new credit card does. For example, if you have a business, if you could invest $10,000 into your business, and when I say invest, I mean towards something. It may be a piece of equipment to make you more productive in your business to hire an employee. Is it towards some training, education or maybe building a service or a product in your business?
Paying Down Your Loans
Whatever it might be, that would make you more than $200 a month. You won’t be able to do that with a credit card. It makes you a steward. We want to make sure we free up the most cashflow possible. If it’s in the car, yes, we want to pay that and then apply the $500 either to the credit card or to somewhere else where we make more cashflow. That’s the point. The eventual goal is to pay down your loans. In many cases, you may want to pay down all of them. In some cases, maybe there are some loans you never want to pay off.
To give you an example, here’s how you know the scale of which loans pay off. If the cashflow index you get, let’s take the example of that car. The car loan, $10,000 divided by $500, that’s going to be $20. Your cashflow index will be $20. The credit cards, $10,000 divided by $200, is a cashflow index of $50. It’s two and a half times more effective to pay off the car.
Now, if you do that, that car on that scale, one thing I’m looking at is the cashflow index, and we are trying to go through, we prioritize in order of importance. The lowest cashflow index needs to come first, then the second lowest, then the third lowest, and so on until you get to the highest. If the cashflow index is 0 to 40, I will pay that off as soon as possible. 0 to 40 is a sweet spot, especially 0 to 30. You want to pay those off, so 0 to 40 first, after that 40 to 100. That’s a questionable period. It may be okay. It may not be.
It’s something you want to look at. You may want to refinance it or do something to pay it down or get those payments down so that the index will go higher. With 40 to 100, you are looking at refinancing it or making it better. If it’s over 100, then you probably want to leave it alone. You probably don’t want to pay it off. For example, most mortgages are $200 now. If you get a 30-year mortgage, you will have about a $200 cashflow index. That’s good.
That means for every $200 you have of a mortgage balance. You are only paying $1 a month. Wouldn’t it be nice if you had a credit card for every $200 you owed you only paid $1 a month? That means if you had charged $200, you would only be paying $10 a month. That would be pretty awesome. I’m not likely, though, credit cards are more in the range of about 30 up to about 55 or 60. If you have one that’s over 55 or 60 on your credit card, hold on. That’s a good one.
Creating More Cashflow
When we are looking at this, we are looking at how do we create more cashflow. How do we create more easily? The lower the number, the more we want to pay off. The higher the number, the more you don’t want to pay it off. Now, I will give you an example. I had one client named Tony out in the Midwest. Tony had several loans personally, and that’s some money that we could use and save money from my IRAs and things like that.
Some of that money can be used to create a better return than you would make on the stock market. We were able to use $40,000 to free up about $30,000 a year. That was pretty amazing. What was interesting is that he was showing us his personal money first but then, all of a sudden, as we were talking about it, he said, “By the way, I do have these leases through my business.” If we paid off these lease options, it was about $45,000, I should say. He would free up about $2,700 a month.
We are about a little over $30,000 a year. I changed it. Even though these were lower interest rate leases, I said, “Scrap the plan. Let’s pay these things off,” so we did. To me, with that very little money out of pocket, he was able to free up a lot of cashflow every month. That’s the thing you want to do. We want to find more money. I’ve had other people. I realized I was onto something when I was looking at a young woman’s loan situation or cashflow.
She was almost breaking even every month but she was a little bit in the hole. I looked at everything, and I realized. As we look at this, we get creative and how to make money without money, so to speak. I’m moving money around. I said, “Your credit card is better than your car loan now,” because her credit card had a high index while her car loan didn’t.
I said, “Here’s what I would recommend you do. Let’s even do this. Start using your credit cards for everything you possibly can of your personal expenses, groceries, gasoline, anything possible. Anything that will let you use a credit card. Maybe utilities, in some cases. Mortgage payments, you usually can’t do that. Anything you bought you used a credit card for, charge it up. The money that you save use that money to then pay off the car loan,” which she did.Focus on investments that create the best returns. You tend to free up more cashflow off your loans and relax more. Click To Tweet
The thing that was crazy was using that same money. Even netting out the payment to pay on the credit card, she still freed up about $250 a month for free. She said, “Chris, do I have this right? You are telling me to charge up my credit. Use that money to then pay off my car loan?” I said, “Yes.” She said, “That seems crazy.” I said, “I know. It works. It’s good.”
Now the bucket, this is insanity too, and I don’t blame you because I thought the same thing. Here’s why. When you put a common sense of real life to it, think about what happens. Sometimes we have an unexpected income drop. Sometimes we have unexpected expenses come up. What happens in your life when those things happen? The cashflow is already tight. What do you naturally do when it becomes tighter? Usually, what happens is you go through panic. You’ll lose peace of mind. In fact, you won’t because you know something can happen. You can try to frantically get to a place you can do it.
This is why people get so emotional about loans because they will say, “Chris, I got to pay this off. I got to do it now. I can’t wait to get out of debt.” Guess what? The reality is, for most people, even when they’ve paid off all their loans, they still don’t feel a lot better because it doesn’t free up as much expense as they think it does. Sure, in some cases, it does but for most people, it doesn’t free up as much because you still have expenses outside of your loans.
I will say, “Great. Let’s focus on the ones that create the best return.” When it happens is when you tend to free up more cashflow off your loans, and you focus on that, you tend to relax more. This is very true especially if you are in a business. If you are in business, you need to relax. The worst thing you can do is worry about money. When you worry about money in business, you get desperate and start asking people to do business with you because you are desperate.
When you are desperate, you drive people away. They don’t trust you. They don’t want to do business with you, and you don’t know why. Even if you don’t tell them about your financial situation, people can sense desperation, and they don’t want it. You want to make sure that you are doing everything possible to keep your income much higher than your expenses. This is why the cashflow index is so amazing and cool because it makes it easy to think about which ones to pay off.
By the way, bonus tip here. Do not pay extra for different loans. Pay extra for one loan. If you are going to pay extra for a loan, you only pay for loans that are like credit to other lines of credit. The thing where the payment goes down as you pay it down. Why is that so important? One of the worst things I see people do is say they have a student loan, a mortgage or a car loan where the more you pay it down, the payment stays the same.
The payment does not decrease when you pay it down. Not until it’s paid off do you lose the payment. You will put an extra $5 into your car loan. What happens if the payment stays the same? No cashflow is freed up. Something bad happens. You are stuck. We don’t want that. Instead, I would have you build it up in a savings account. The only thing we want to pay down extra every month is your fees like a credit card but credit where the payment does count as you pay the balance down.
That’s the key. If you are going to pay something either, 1) You pay it down on lines of credit or, 2) You pay it until it stays. Whatever you do, though, make sure you are paying it to pay off the loan at a time. Do not spread out your payments, you have extra payments everywhere else. Pay one loan at a time. Pay that lowest index first, then move on to the next one. When that’s paid off, then move on to the next one and so on. That is the key.
Watch what happens as you do this. You will start to realize you have found more of them. I’ve seen people do this. Sometimes they get worried and they say, “Chris, I know this makes sense but I’m a little nervous. They are not paid off my card yet.” I say, “I know but trust me. It works.” Especially when people realize that we start combining a little bit of savings strategy with it and things like that too, people come back, and they will have some such event happen and say, “A-ha. Now I get it. Chris, that was brilliant. Thank you for letting me not pay off my card first,” especially if you have a higher index.
Qualifying For Loans
That’s where you do. Now, I will tell you another part, too. This is also great if you are trying to qualify for loans. For example, a couple out in Arizona were trying to qualify for a mortgage. Their debt to income-ratio is too high. This means that compared to their income, their loan payments were higher than their home loan payments. I asked them, “When you talked to the mortgage broker, and he said that you couldn’t get the loan due to your debt-to-income ratio, what did he say that?” They responded and said, “We need to pay off the $7,500 credit card.” I said, “Did they tell you how much money you need to free up every month?”
They said, “No, he didn’t.” I said, “Here’s what you are going to do. Go back and ask that mortgage broker how much money you need to free up every month to qualify for that loan.” They came back a week later and said, “He said $41 a month is all we need.” I said, “A-ha. Not the $76 that you need to own the credit card. Here’s what you are going to do. This credit card is a $7,500 balance. You are paying $76 a month. That means a cashflow index is about 100, which is amazing for a credit card.” You usually wouldn’t want to pay that off very fast.
I said, “If that’s the case, here’s what you are going to do. Since we know that every $100 you pay on the credit card, you will free up $1 a month. Let’s only pay $4,100. Pay that much. Leave the other $3,400 on the credit card and watch what happens.” They did. They paid the $4,100 down, freeing up the $41 per month, and qualified for the mortgage. That saved them $3,400 to bear what the broker was telling them to do.
That’s the power of the cashflow index. We want to build to get the biggest bang for our buck. Remember, take the balance divided by the minimum monthly payment, the lower the number, the more we want to pay it off. Especially if it’s below a 40 on the cashflow index, if it’s higher, then don’t worry about paying it off.
Granted, there are lots of different strategies we might do. There are times when we do look at the interest rate but usually when there’s a tie of the cashflow index. I don’t always ignore the interest rate. To improve your credit score, we might change the strategy a little bit, so that would change it too. Remember, it’s always case by case. That’s why we look at it individually to see what’s best.
Anyways, you want to figure out how to pay off your loans the fastest and the safest way possible, which by the way, I’ve seen this work. Some of the fastest ways to pay off debt, too. Especially and emotionally, you are in the right place some people will pay it off even faster than common things have. They are focused on the interest rate or balances.
I’m telling you, this works. It has worked for hundreds of my clients and has produced great results. Focusing on the cashflow index, everybody. Write them all out, record them, figure out which one you are going to pay off first, and start that snowball method using the cashflow index instead. This is Chris Miles here, your cashflow expert and financial advocate for entrepreneurs, signing off and wishing you a great and prosperous week.
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