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.
Paying interest on certain debts is one of these four horsemen—but it’s important to recognize that not all interest is the same.
The Dave Ramsey’s of the world want you to believe that paying off all interest rate debt—especially the highest-rate debt—is the best possible decision for your finances. However, interest on debts that you can outsource to someone else—such as with rental real estate—can arguably be a productive expense.
That said, other types of consumer debt, like credit card debt, which typically comes with high interest rates, isn’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’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.
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—and interest—to eliminate first. Here’s what you should know about this approach.
The Cash Flow Index: A math-based approach to eliminate interest paid
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.
This system has grown in popularity over the years due to the sheer practicality of…