How to Pay Down Debt: Strategies for Debt Payoff / Garrett Gunderson

the cash flow index is really at the heart of it it's way that we can analyze each debt from a cash flow perspective which is exactly the way the banks and lending institutions analyze loans right they teach us to focus on an interest rate so that they can focus on cash flow we need to focus on cash flow right so if you only focus on the interest rate that may be a fool's errand that might not be the fastest and best way to get rid of these loans money could be complicated let a nerd help you we're here to demystify the complex nature of money by getting you answers from financial nerds and wiz kids welcome to ask the money nerds a weekly segment of the wealththoughts podcast where we answer your most pressing money questions debt thing that people get pissed off about sometimes it's fun to get into not always fun to get out of and sometimes it's circumstantial just crazy things that happen that put people in this situation so this is judgment-free zone it's more about how do we create some solutions here we've got a few questions that came in i'll turn it over to chief of staff stoba yeah let's do that yes let's give the people what they're looking for okay give the people what they want yes we're here to answer all of your money questions so the first one's coming in from romina she says my question is how do we pay off our credit card debt we owe twenty thousand dollars in balances i was thinking of applying for a fixed personal term loan which we are approved for at 11.9 for 84 months i'm on social security disability of twenty three hundred dollars a month my hubby averages 15k adjusted gross income per year we just can't get out from underneath the credit cards i want to be in somewhat of a financially secure place in three years i know we can do it we just need some guidance so let's give ramina and her husband some guidance on what to do with their credit card you said that uh the reason he's at fifteen thousand dollars of income per year is some health issues yeah there was just a series of unfortunate events that happened that kind of put them in the first thing i look at in this situation is how do we increase income right if that's at all possible is there you know side hustles um i mean i did a phone call this morning you heard me on speaker they're making money on their on their vehicle using turo.com they're driving it they're running out three times a month and that renting it out on turo is paying for the the car and cash flowing so you can always look at existing resources to find out how to be resourceful you know one of our mutual friends that's been on uh the podcast a bunch in youtube with me demi rented out a room on airbnb you know there's millions of stories of uber and lyft drivers like that like you always got to look at like do you have existing resources and things that you can do to be more productive i started my first car detailing business because my dad had plenty of cleaning supplies in the garage and my mom worked at the credit union my dad worked at a coal mine and i cleaned those vehicles so look at what you have there first then we look at the loans and to me one of the things that's critically important is called cash flow index where we take the loan balance we divide it by the monthly payment okay if this number is 50 or less we have a cash hog on the hands right that means it's a very inefficient loan if that number is you know greater than 100 that's a really efficient loan it's actually not requiring a very large payment for how much money you borrowed so if you're trying to pay something off you want to know your cash flow index of any loan that you have because it kind of tells us the priority now in their situation the 11.9 percent's high but at the same time because she's on fixed social security amount of income and her husband's not earning as much income that's why it's a higher interest rate now do they have other assets or anything else she didn't go into details on that um one of the things i always look for is are other assets that are out there could you borrow from a 401k could you borrow from cash value could you go refinance a car right we're looking for anytime you have collateral like cash value has collateral of life insurance where they'll lend you money based upon how much you have um usually loan interest rates on 401ks are really low now it's not my favorite place to go borrow money because there's fixed paypa payback periods and it's all pre-tax dollars that you're paying back with after-tax dollars so there's disadvantages but if we can lower the interest rate we can lower the payment we can improve the cash flow those are things to look at there's also intra-family loans we've had people that just borrow from family members because they're sitting on plenty of cash uh we've done it for down payments for mortgages and things like that because now they're earning more than they were in their measly savings account but at the same time there's collateral behind it and they're helping out someone they care about so i want people to think more resourcefully first and so 11.9 for 84 months that's kind of a high payment obviously that's going to be a lot of their their income you know is going to go to this so i want to look at those other options now if she has the option of refinancing a current car loan that her and her husband already have how would one go about doing that go to your bank or credit union it's already collateralized you know so it's a refinance most people don't think about they think about buying a car and financing it up front but if it's paid off you could always go and get a loan the car is collateral it's actually a car loan so you're going to go talk to your wherever you're currently banking at where where you already have an account okay now the other thing i think is really important is understanding the cost of money will you go in into that a little bit okay cost of money is simply the highest interest rate that we're paying for our money is a cost of money so in her case 11.9 percent if that's where all of her loans that anytime she spends a dollar it's costing her 11.9 right so it's the highest amount that we're paying on our money or it's forfeiting interest that we earn depending on what that is so let's say i know i can earn five percent on my money i know with really high levels of certainty five percent is pretty easy to do anytime i spend a dollar i'm forfeiting the right to earn five percent interest so it's either we see we always have an interest cost right mm-hmm we either pay interest if we borrow or we fit the right to earn interest either way there's an interest cost it's just more obvious the one that we're paying for than when we forfeit the right to earn so our cost of money is kind of that bar that says at this point um i have to earn at least this much to make it worth my time like if you have a five percent loan and someone comes and says i can get you three percent guaranteed not too exciting because you're losing right because you're son of that you're paying five and you're only earning three on the other hand if you're only paying three and you can earn five maybe the fastest way to pay off that loan is earn the five percent if it's got predictability if it's stable if it's secure there's a lot of people that erroneously like remember your college notes that said oh the market's just going to do 12 well if the market was really gonna do 12 the slowest way to pay off a mortgage would you pay the bank extra money the fastest way would you invest the 12 and then when it grows you pay the mortgage off and you've earned more than you would have saved by paying it down right but the reality is the market doesn't get 12 percent it doesn't do that long term yeah there's a whole bunch of fees and taxes and all sorts of riddled with holes along the way where it goes down so we have to be really careful but knowing our custom money helps us understand whether we should invest or pay off whether something's efficient or inefficient effective or ineffective so i always think about my cost of money before i do something because there's always an interest cost and that's where the cash flow index comes in isn't understanding your cost of money so knowing your cost of money it's personal finance has to be personal for some people paying off a loan is so critical for them because it brings peace of mind they feel oh i'm finally free for other people like i have a mortgage on my home it's i don't have car loans i don't have a mortgage on my cabin but i have it on my home because i don't plan on staying there forever it's really low interest and in a highly predictable way i can out earn it and i can pay the home off tomorrow if i want to pull it out of my cash values yeah now other people they just don't feel comfortable with that they're going to lose sleep no savings is worth that right so maybe you're just best paying that off and now you can be more productive one is the economics which is your cost of money the other is your peace of mind which is what your personal preference is and i think we need to take both things into consideration or some financial gurus just automatically go pay off your debt or else you're enslaved the bible says pay off your debt or alternative slave but most people haven't even identified what debt is that's when you owe more to someone than you have in an asset when you have an asset worth more than what you owe that's actually equity it's the opposite so my home is worth more than the loan on it i'm not in debt i'm in equity but i do have a mortgage now that's probably blowing a few people's mind and a few people are pissed off right now and they want to tell me paying off my mortgage the best thing i've ever done in my life i'm not some people get very passionate about that you paid it off congratulations yes i never told you not to i have no dog in the fight i don't care it's just know your options and do what's best for you and the peace of mind is a really important factor i think sometimes gets left out of the equation it's just like if you scrimp and you save and you kind of cut back like eventually you'll get there and be able to enjoy your life and you'll be able to show up but i think peace of mind allows us like if we consider that in part of this situation and in our lives it allows us to show up differently in the world and when we show up with more confidence because we have peace of mind then we can create greater value we can be more creative with our thoughts we can we're more open to connecting to other people which expands our means so peace of mind is actually i think a really important part of deciding what to do with our money it's an essential piece yes okay so we're going to move on to a question coming in from richard so you've discussed a couple of ways that romina could pay off her loans richard has has a specific question he said should i follow dave ramsey's plan or use a different strategy for paying off my debt faster i've been doing some research on trying to pay off my debt i love the idea of the snowball effect where i pay off the lowest bill first and use the extra income to pay towards the next biggest loan do you have any suggestions or comments i'll let you speak and then i have a couple of follow-up questions you know that's a good plan uh what i like to do is a combination of what's called the cash flow index that we just showed loan balance divided by monthly payment and you only attack one loan at a time pay the minimum to everything else since the one with the lowest lowest cash flow index is what you're going to pay the extra to now the difference between that and debt snowball is this takes a little bit of consideration into the interest rate yeah right i mean i like i like the philosophy of let's just pay off the one that's the easiest to pay off the fastest payoff because then that's freed up and we got more cash flow love that but this is just going to be an equation that says well let's let's figure out which one's going to be the bigger movement which one should i talk about right yep and then in order to really improve it the three r's are restructure reallocate and renegotiate so to restructure a loan we're looking at well what if you refinance your home and pull other loans into it that have higher interest rates and now you've got lower interest rate what if you you know what we said earlier refinance your car and pay off higher in straight loan so if you can restructure or refinance loans you might be able to get better cash flow indexes and therefore pay less in interest then the second thing is reallocate let's say that you just have an underperforming asset you have something that's not earning a high interest rate but you're paying more than what it's earning let's cash that thing out pay off that loan and then that's going to free up that cash flow that's going to get you a guaranteed return because you've saved the interest or renegotiate like if you have a credit card don't just assume whatever they're charging you is what you have to pay call and renegotiate ask questions like hey what are your best deals are there balance transfer deals um if i'm looking to cancel what can you do for me to keep me as a customer these types of questions so you get to the retention department and they lower those interest rates or streamline refinance with your home where you stay with the same company we get a lower interest rate because you have options because interest rates are low you just have to make sure you have a good credit score decent collateral which is cars and homes or decent collateral right the right um cash flow reporting so you look good to the bank yeah and then good connections so you're going to the right institutions that specifically deal with what you're looking for so so i would say go with the cash flow index pay only extra to one loan at a time but as you do that look to restructure look to reallocate and look to renegotiate the interest rate so that you can have actually get ahead even faster okay so is there um ever a time when the snowball method is a good fit for reducing debt sure it's not a bad method at all yeah just always consider the cash flow index the interest rate i'm just giving it a little bit different take on it and here's my big concern if you're trying to eliminate debt don't get in a scarcity mindset that's all about reduction and sacrifice and scrimping and saving look to keep more of what you make get more efficient look to expand your means like you said how can you add more value how can you increase your income so you have more to work with yeah aim into that i remember when i was using the snowball method myself to pay off my plymouth neon back in college and and just even after i graduated my plymouth neon it was purple you know just riding in styles in business these days i haven't heard that word for a while as a car company i mean i don't know i don't keep up on cars okay but maybe it was a dodge who knows but anyway it was a dodge neon okay so i was paying off this little car of mine but i remember spending hours every month like budgeting and i would like erase and i would move money around inspired fill my no i would fill my envelopes and you know and it was not inspiring i didn't i wasn't thinking about how to expand my means it was just me trying to get by gotta start with production first yes and reduction second yeah be mindful with your cash be frugal's fine but as soon as that starts to turn into miserly as soon as that starts to consume your thinking as soon as that starts to be you miss out on life and you don't invest in yourself and you don't think about impacting others or value christians that's where it becomes detrimental and it was actually really stressful for me you know so i i i'm just stressful for you that's what you trade it off you don't have to worry about your debt but you gotta stress about my crap yeah so i think it's um it's a good starting point like you said um richard maybe just incorporate some of these other things and you know if i would have i think of investments if i would have spent the two hours a month investing in myself investing in ways to expand my mind and grow in deeper ways i probably would have been more fruitful so i know that's preaching in the choir you talk about that all the time but i experienced that so i can relate to richard and i think it's a great question there's like four different systems out there that people are using to tackle their debt yeah and some of them work don't pay it and go bankrupt yeah or you can just do it haphazardly yeah so don't pay i guess that's the fifth one yeah just don't pay any go bankrupt get massive student loans and they don't get a job and then just default but they'll still come after you those all are not good strategies so so anyway i mean some people just they don't have they have a half paddles and approach to everything in their life their money avoiders and so you know they pay their bills and they don't have a system and so like you say it's a shotgun approach they don't really know where they're funneling their money but there's really three systems out there that i've been you know aware of that people are using very successfully at paying off debt and each of them has their merits one of them is called the debt avalanche which is a system where you focus on the loan with the highest interest rate okay and you line up all your loans from highest to lowest interest rates and you target the one with the highest interest rate the second one is called the dead snowball okay snowball i don't love that one either the debt snowball uh is one that was developed by a gentleman out in tennessee and davey ramsey davey mr ramsey yeah he's good for the train wrecks if you're a train wreck just i mean he's got good advice now right this diversified investment portfolio is going to disappoint you but his whole path to get out of debt by living off rice and beans if you're a train wreck he's really good it works because he focused on the psychology of the person and so he'll line up all your loans from smallest to biggest and he'll pay off the smallest one and as soon as you pay him and momentum is snowball until all the debts are paid off now he goes a little bit extreme in the event that all debt is evil all that's bad you want to put your credit card in a freezer and block of ice and you know buy off rice and beans while you do that i did notice his website took credit cards back in the day though did it really i don't know if it's still that i don't think it does anymore but very important pertinent information for you guys it's parade it's trying to poke other people that teach finance on it that's right so i was intrigued with the psychology of his system that you know that you know paying off debt you know based on the lowest to smallest highest balance and i remember we worked with jessica marsh and she used to follow his system but he lived pretty miserly and miserable because it was all about like every dollar had to happen ramping us crazy cleaning and scraping and living in a house they didn't want and driving cars they didn't want right he was going to say that we're kind of bad asses and then we took jessica we saved her 2 500 a month with what we're about to teach you um then we saved another 2 500 a month saving tax and then we had him buy this dream house that was on a big farm that i went and visited they had chickens bees uh and the horse and then built up their practices and now she gets to take a three-year sabbatical when her husband's oh i didn't know he's going to be yeah i took her metallica concert recently in birmingham oh my gosh good for her i went to speak and then went to a metallica concert it's good to hear that this is what i do you got hair like this you got to go to a metallica show that works right this is a this is this can be a game changer honestly and about eight nine ten years ago i was going through a period of time where i was you know kind of struggling a little bit because i had you know accumulated a little bit of real estate hormones didn't really know garrett didn't listen my advice was like don't invest with that one dude you're gonna lose it all right i did lose it all unfortunately i hate to say i told you so but right you could have been jammed that way it was before i met you garrett so i mean what do you do so anyway i developed this system called the cash flow index which is a system that allows you to determine the most effective most efficient way to pay off your loans and what we do is we'll take a look at each of your loan balances and there's a simple formula that we use you take the balance of your loan and you're going to divide it by the minimum monthly payment not annual timely spits out a number spits out a number the smaller the number the worse at effectiveness and efficiency the loan correct yes the bigger the number the better think basketball if you're scoring 50 points yeah right that's right you score 50 points in the nba and you're gonna lose that game for sure every time yeah so the smaller the number the worse and we we usually say that if you have an index less than 50 that you're in the danger zone which means you got to pay off that debt now is your hair is on fire my hair has been on fire a lot as you can see your head's a lot older than you are it it probably is that's what i've figured out that's right your head's like 80. you're like 40 40 yeah i'm 45 so yeah yeah so anyway we we we put all your loans in the system and you spit you spit out that number and then what we'll do is we'll line up all your loans and liabilities based on that cash flow index and then instead of using a shock every loan but one but the one that has the lowest index let's say so ignore the interest rate and focus on the cash flow index the cash flow index will take into consideration the interest rate but not as the sole piece and someone is going to go through this and you're going to find out your lowest cash flow index is a zero percentage straight loan and you're gonna be like why would i pay off a zero percent interest rate loan because we're looking at the bigger picture here we're considering debt to income we're considering cash flow we're considering like freedom and and you know safety it's not just one aspect it's not so an example and we worked with a gentleman quite a while back five six years ago his name was jordan cooper he's actually you know great guy dennis out in arkansas if i remember right and he came into our office and he was in a cash crunch like i haven't seen before the guy had he was expanding quite a bit of business like crazy and what i did is i did a kind of a detailed analysis of all of his loans and we found out that there was like 10 of them that had an index below that threshold of 50 and we're like we got to get rid of this quickly and so we had a quick triage we met we talked about a couple different options we ended up taking out a larger loan business loan at a much lower interest rate so a lot of his you know interest rates on his loans were eight ten percent we consolidated all that debt into a single loan the complexity and like his life went out the interest rate on that loan was about five five and a quarter percent and he freed up seventeen thousand dollars per month not per year yeah but per month in cash flow i mean can you imagine what kind of difference that would happen that's a gangster move seventeen thousand a month he was happy with us yeah i mean but here's the thing when he says debt consolidation he's not going to a debt consolidation service and harming his credit or doing something like that he's simply restructuring his loans could you use a car loan that's a more efficient loan than a credit card could you use and refinance that could you refinance a home and pay off a business loan there's like different ways that you can restructure these loans to improve your cash flow index you don't just have you're not just stuck with the cash flow index that you have exactly so we just simply re restructure some of his loans and he was able he had told me beforehand that he had a really really hard time saving money for the future he just couldn't do it he couldn't even live wealthy today oh my gosh yeah i think he was redirecting 10 000 a month into his wealth capture account he also i th he loved to spend so i think he was spending quite a bit of money on enjoying himself yes gifts he gave me a nice big old paleo basket i attempt to eat paleo it's just that there's non-paleo food that tastes really good i love it but i buy paleo stuff and then just sneak a little ice cream in here and there exactly non-paleo love it sorry rob wolf so anyway this is a system that we've used successfully with thousands upon thousands of people here at wealth factory and i don't know what the number looks like about seven or eight years ago when i was running the numbers it was like we had helped people pay off over 20 million dollars worth of debt and we'd help them free up on average about twenty seven hundred dollars we got other coaches that was that was like that's just you six years ago yeah yeah i mean like it's probably in the hundreds of millions of dollars i guarantee it because we got tim we've got reeves we've got wade we've got we got a crew doing this kind of stuff for you so use this cash for index pay the institutions less money keep more shave off the time that it takes to pay these things off it'll boost your credit score your confidence and your wealth capture account and you don't have to be on miracle whip you can have jam thank you garrett yeah this is really nice i just you know i'm so generous look at that it's like this is a big deal this is more than i've had yet in my lifetime all right cash flow index loan balance divided by minimum monthly payment categorize all of them only pay extra the one with the lowest cash flow index if it's a really high cash flow index you might not even pay anything extra to it in the future because you might go well i'm going to sell my house in the future anyway and i've got enough money earning an interest stashed away it really comes down to personal preference and your own peace of mind let's talk about this cash flow index and how it works okay so the cash flow index is really at the heart of it it's way that we can analyze each debt from a cash flow perspective which is exactly the way the banks and lending institutions analyze loans right they teach us to focus on an interest rate so that they can focus on cash flow we need to focus on cash flow right so if you only focus on the interest rate that may be a fool's errand that might not be the fastest and best way to get rid of these loans so if you have more than one loan what you want to do is write down these loans individually what's the loan balance and then you want to divide it by the minimum monthly payment not what you're currently paying but the minimum monthly payment with each loan individually so loan balance divided by minimum monthly payment that's going to spit out your cash flow index now if that index is less than 50 i call it the cash hog yep you have a cash hog on your hands that means a high payment in relationship to a relatively low balance great situation for the bank and financial institution because they're getting a lot of cash flow without a lot of their capital at risk right but if it's above 100 that's a more efficient loan meaning okay you have a decent amount of money that you borrowed with a relatively small payment in relationship to that now somewhere between 50 and 100 i'd call that the danger zone or the you know maybe where we look at is is there a structure that you go through to improve your cash flow index but let's just go through this and why it's so simple and the methodology of how to use it yeah i mean the simplicity of it is just that simple formula that you gave them it's so easy to quickly identify which loans are cash efficient for us and which loans are cash efficient for the bank once we identify that now we have complete control over those payments and we can i prioritize which ones to pay off prioritize the payments we're going to make we'll see i see why i call it the flock shoot of debt repayment right where people say well i've got all these loans and i'm going to pay an extra this much to each loan and they feel like they're making a lot of progress right the shotgun approach yep right just like you shoot and all of it goes there it's like okay whichever loan was due earliest is what you know okay i paid extra because that extra money then the next one you pay extra too it's a slower more risky process like what we're really teaching in wind and play is economic independence economic independence is creating enough recurring revenue which is known as cash flow to cover life's basic expenses so sometimes it's hard to create that cash flow and some of the easier things to do would be to lower the expenses but not through budgeting and cutting back and elimination simply through efficiency through what you could do with the cash flow index to eliminate an expense not because you cut back and enjoy life less but because you deliberately and intentionally attacked it in a way that helps you to lower that bar right when it comes to standards we want to raise the bar when it comes to economic independence we want to lower the bar so it's easier to get over or to jump over i don't i don't jump very high so that kind of helps me out right perfect all right so so let's say you've got five loans and one of those loans is a 30. the other loans are in the 50s 60s or over 100 so tell them what to do so you're going to focus all of your efforts towards loan repayment towards that cash linux it's a 30. now the other thing about it too is depending on the balance or the size of that loan it depends comes back into control of the money so if it's a hundred thousand dollars that i owe and i can only afford to put a thousand bucks a month extra towards that loan it's going to take me quite a few years to pay that off so i don't actually want to make that thousand dollar month payment to them every single month right i'd rather put the thousand dollars a month in my own account earn money on that use it for growth and then let that grow till i have a big enough balance to pay the bank off just be careful you're not gonna go put that in the stock market or mutual funds or some speculative investment like cryptocurrency we want something that's stable we want something that's fairly liquid meaning it's available to you you could access that and it's not going to be volatile that because of the economy all of a sudden you're like oh i thought i was doing better but now i'm not and it's going to take me longer to pay off this loan so you'll want to just continue to be a listener to figure this out as we continue to unveil different opportunities but we want to begin with the cash flow index you only pay extra to the one with the lowest but if you find out that that's still going to be years before you pay it off you want to set up a separate account and start funding that account first because you want to build up enough in there to be able to write a check to pay this off in one fell swoop while you still have access to cash liquidity and a chance to earn interest so we'll have other podcasts on how you can lower your interest rates or how you can restructure your loans or how you might be able to reallocate if you have inefficient or underperforming assets but right now we just want to focus on the cash flow index and look you might even find that if you have a lot of loans and you're feeling what most people would call deeply in debt that that can be in hindrance for your health for your sleep and for productive thinking so i even have a strategy around that because we want to help you abolish scarcity it's the greatest destroyer of wealth and one of the ways you can do it is what i would call the 90-day debt delay where you find your cash flow indexes and if you have one that's a really low cash flow index rather than immediately putting money towards that low cash flow index for the next 90 days where can you invest your money as a business owner to increase productivity and profitability as an employee your increase your skill set or increase your ability that would allow you to get a raise and maybe even learn what to ask and what to do in those interviews in order to increase that income so that you're investing back into yourself so you become more productive and then after that 90 days now you can regroup with an increased income to start attacking those loans it reminds me of when i was flying out of newark so i was flying out of new work in the pilot guidance said we're number 27 for takeoff i was like we're gonna be here for a long time then they opened another runway that was actually going east and i was trying to go back to salt lake city but once they got in the air they just turned around so we actually went in the wrong direction for 10 minutes and then we turned around and started heading the right direction but it was better than sitting on the ground waiting forever so the 90-day that delay could feel that way you're like well i'm not actually paying down my debt right now or not paying down my loans to be more accurate well the reality is yeah but you're now increasing your production you're becoming more abundant you're being able to create more value you're increasing your income which can make a massive difference over time rather than falling prey and victim to being in scarcity and only scrimping sacrificing saving delaying deferring paying this down and not having any ability to think more productively absolutely and i love the cash linux because it gives us an opportunity to discover what our best opportunity is for our cash right right we can look at that cash index and say well how much cash flow am i bringing up if i go after all my loans but if instead i use that money as you just described to grow will that outgrow the money that would have been saved by paying off those loans right you're going to hear a lot from us invest in yourself first always right so you're doing that now and in the future you're going to hear us say you want to build up plenty of safety and liquidity because it's not just so that you can handle turmoil or turbulent times but it's so that you have cash for the opportunities that come your way there's going to be opportunities whether that's to buy a business whether that's to make the right investment whether that's to you know grow your money not because of hey everyone's doing it because something within your expertise something within your wheelhouse something within your knowledge we're all in store for dozens of opportunities over our lifetime most people just don't have the cash to capitalize on it and the best time to be able to capitalize on it is when no one else has access to cash because it's all tied up in the equity of their home it's all tied up in paying down one loan that didn't lower a payment so we're trying to help you get more control over your money have the proper methodology have a lot more efficient method and use and determine with this cash flow index and now what i've seen happen sometimes is sometimes the one with the lowest cash flow index is a zero percent interest rate loan either a credit card or a car loan and so people will kind of battle with me or say well that doesn't make sense i would pay off a zero percent interest rate when i have a 12 credit card over here absolutely and the only time it would make sense is if those balances are similar right or the cash index on them are similar right then i can understand like okay well one's at 20. and the other one's a 22. right fine go after the one with the interest rate but when there's a big difference you're gonna get so much cash freed up for so little capital invested that you can now go attack that next loan with more vigor with more cash absolutely and you've lowered your risk because you no longer have that payment and we're looking at everything from debt to income debt income is for every dollar you earn what percentage of that dollar has to go towards your loans right and the higher that amount the harder it is to get access to borrowing or maybe even better interest rates because you can't go borrow the money because you've used too much of your debt to income so if we can lower the bar from economic independence because we pay something off and then attack the next loan with even more cash that has been freed up and plus if we lower your debt to income you might have access to better loans and maybe paying off some of these loans actually improves your credit score and improved credit score might lead to getting better interest rates we're looking at a much bigger picture here not just isolated in one single vacuum absolutely and that's what happens a lot of times with the loan thing right it's just get out of debt get out of debt get a debt at all cost any and all cost and so they just attack those loans with full vigor they they jeopardize their safety and security they jeopardize their growth in production and all those things the cash flow index allows you to get back into control and say nope this is the best way for me to handle it i'm only handling this one i'm going to do a debt delay we have all these options that allow that growth in abundance which will far far outgrow the benefits of just total loan elimination right so loan balance divided by minimum monthly payment find your lowest cash flow index after you find your lowest cash flow index look how long is it going to take to pay that off if it's within 12 months you might just put money directly towards that to pay that down if it's going to be years and it's going to take longer you might want to set up a separate account and start saving your money we'll be able to reference different opportunities and options as we go through a tool called cash flow banking and a strategy that way where you can store your money and get maybe four or five percent in a tax advantage way rather than sitting at one maybe two percent in a taxable way in most savings or money market accounts and they even get two percent you got to put in a decent amount of money or have access to the right types of banks for that so we're looking at what are the most efficient ways you might delay paying any loans for 90 days invest back into yourself and skill set back into your business if you own a business or even creating a side hustle where you can start using those dollars to invest in building out the processes procedures or the types of things that allow you to earn that extra income and then when your income goes up then reallocating towards attacking a loan and paying it down or reallocating towards putting more money into that savings account or that investment account that's more safe and stable that then when that grows to a certain amount you could pay these loans off so look at those cash flow indexes understand where you're at and even if it's a lower interest rate you might attack something with the lower cash flow index because it's going to free up that cash flow faster to attack the next loan you might improve your credit score which means there's going to be more opportunity we're looking at the big picture and i'll kind of end with this i was in minneapolis i remember this because i just left cancun where it was 82 degrees we're talking fahrenheit then i flew into minneapolis where before wind chill it was negative 22 degrees the only conversations we had there were about the weather every time i saw someone they were typically calling someone to come start their car i met people that this they did this for a living because it was so cold you had to have special tools just to get the car to turn over and my beard was frozen when i walked outside because i had some like oil in it to kind of shape it i was like wow this is insane and now i'm speaking to 400 people and before i've even really said anything this woman's raising her hand which made me think maybe my fly was down what was going on i wasn't sure but she was pretty emphatic about it and so i was like okay i finally called on her and she was like i'm a cpa and we joined working with your team you know 13 and a half months ago and your team said we'd be able to pay off our loans with a third less time and that's not the case now i started to consider when she said this maybe i need to go outside even though it's negative 22. that's where i really remember the weather she says in reality we only have 18 and a half months left now what did they do they looked at the cash flow index they found out which loans to attack one at a time they then used other funds that were underperforming to pay off higher in straight loans which created a guaranteed return and improved their cash flow they refinanced some of their loans and consolidated them at a lower interest rate which then allowed a better situation that way right so with all of this it shaved off a lot more than we originally anticipated and then they took that extra money to pay down these loans that was going towards the other loans okay we're going to get into scott's question here before we get ourselves into trouble okay scott's question he says i'm interested to know when during these times you would recommend low cash flow index debt be paid down with everything going on i'm now holding cash pause explain cash flow index real quick well so there's a lot of different systems and this is a really great point of paying off debt and now may or may not be the right time to do that but you know you know there's the avalanches system the avalanche method that we hear from susie ormond which is basically you've got to pay down the loans that have the highest interest rate first there's the dave ramsey approach which is forget about the interest rate let's just focus on paying off the loan with the smallest balance and then have psychological wins and just pay off the rest in order from smallest to largest the cash flow index is completely unique and you know different than anything that has been designed out there because what we'll do is we'll actually analyze the loan itself and we'll look at the balance of the loan and what is the monthly minimum payment not not what you're actually paying toward the loan but what's the monthly minimum what's required what's required to be paid right and so sometimes people pay more and they're above the minimum or they're doing bi-weekly payments or something correct yeah so when we're calculating this just take that out you know any extra payment you're making so you'll take the balance of the loan and you'll divide it by the monthly minimum payment and that'll kick out a number and that number will be anywhere between zero and 300 typically a score under 50 is typically what we call a danger zone debt and so with those type of loans we want to just you know pay off as quickly as possible now the question is is now the right time to do that so let's kind of finish up what he's asking here okay yeah i know that's a question that a lot of people have because as people are not working as much income is down they have debt but then they don't have that peace of mind and they're looking to do something to create a situation um that feels more secure for them so it's like i got to get rid of the debt because it's bringing me stress but then i also need the cash flow to live on and so i get i think this is a common situation yeah it's it feels very um like it just feels like a challenge you almost like salsa dance to that um question i felt like right there feel the rhythm feel the right okay so next part to that with everything going on i'm now holding cash more closely including loaning everything out of my cash value life policy in parentheses he says the bank seems fine as the fed isn't missing a beat but life insurance companies use banks too and i'd hate for mine to get squeezed and i'd work for a mutual and i did work for a mutual life insurance company in the early 90s that went bankrupt so maxing out all of my personal and company lines of credit is something that he's doing three of five income streams have gone to zero so i no longer feel like three months of reserve is enough and six months seem too little as well right now i believe the three streams might come back in july or august so right around the time that we're filming this i'll bet not to tr um level it but sorry good heavens i'm stumbling over my words today let me start the sentence over i believe the three streams might come back in july or august not to the level it was but i might lose another and largest in the largest income stream by the end of the year so i'll continue building up a bigger wealth opportunity cash fund but what besides enough money to pay off debt should i plan as my trigger to start paying down the low cash flow index debt there's a lot there did you pick it up in my stumbling of the words dale i did yes i did so and garrett i'd love to hear your feedback on this too but my first thought on this is that the cash flow index in my opinion is the most efficient way to pay off debt but that doesn't mean that you should always follow it um there's actually a system you know i actually called the 90-day debt delay and gary talks about that as well and i think this covet 19 you know crisis right now that we're going through um you know warrants that and maybe it's a maybe it's 120 day or 150 day debt delay where instead of putting that extra money toward paying down the loans stockpiling cash building that up for liquidity because here's the deal if you put extra money towards your car you pay extra money towards your house if you try to aggressively pay down those student loans you're locking that money up in equity jail that money is no longer accessible to be borrowed against or to take out um and if you know this continues you lose your job and this could be a big a bad crisis for you so it's really important to build up liquidity and i know there's some other financial pundits that disagree that say that you should just pay everything down even now and i just i disagree you might put yourself in a worse situation if you're paying off a loan right and all of a sudden you have that loan go down in balance and then the bank takes that available balance away if it's like a credit card or a home equity line of credit what dale's saying is when it's amortized it already automatically takes it away because you pay it down you can't get the money back out with refinancing and if you're in a cash crunch it's really hard to refinance banks love to lend money to people who don't need it when you really need it they don't want to lend it to you so my methodology here would be the three r's one is look to restructure your loans with interest rates as low as they are now is a good time to restructure because maybe you can lengthen the loans to have a lower payment that doesn't mean that you have to wait longer to pay off the loan that's the misnomer that people kind of fall victim to it means that you have more control of your cash flow and we have all the money to pay it off you can just pay it off in one fell swoop so restructuring loans and lengthening them so or even restructuring them or you're pulling other loans that have higher payments into loans that make it a lower payment like a mortgage or something like that in times of crisis like right now the second is renegotiation if you're going from a non-collateralized loan to collateralized loan like a car or a home you can get a much lower interest rate than a credit card unless it's maybe an introductory rate with the credit card so that could be really helpful and the third one is what we want to be careful of and i think it's really direct to scott's question is reallocation reallocation is if you have an underperforming asset and you're like well if i cash that in i could pay off a higher interest rate loan and free up cash flow the problem is with his income being uncertain and some of it being shut down and cut off getting access to cash and capital is smart and he's talking about tapping into his lines of credit i think it's a good idea now some people are gonna like cringe when i say that because they just think number one rule is stay out of debt but the number one rule is to create more cash flow the next thing is to create more profitability the next thing is to make sure that you're finding new ways to create that cash flow and we're in a major opportunity coming our way so if you don't have access to capital you're going to miss out on those opportunities so if you pay interest to access that capital look at it as like an insurance policy whatever interest you're paying is insurance to have access to that cash is it worth to pay that insurance premium or that loan interest in order to get access to that capital in times like now i would say absolutely certainly yes unless you're absolutely destructive with money he's an investor he's got several investments i don't see that being the situation with scott other people as soon as the dollar shows up a dollar fifteen is spent don't ever get access to cash get rid of every credit card never borrow money rent your rent instead of buy if you're not gonna be responsible your finances and you mistreat money it's gonna mistreat you and you know unlike bad relationships that might stick around money just goes out the door it doesn't exist it's not partial it doesn't you know hold on for hope for a better future it just says i'm gone so these are the things we have to pay attention to so i think that's quite a bit of information for scott really and hopefully some good you know insights go ahead and here's one tip that i would share as well and i've heard you talk about this before garrett as well but uh scott if you have a fully paid off car one thing you could do is go to the bank and take out a cash out and refinance the car because right now interest rates on vehicles are two two and a half three percent maybe a percent and a half i mean they're ultra low right now if you have higher interest loans this is a great way of you know lowering the payment and lowering the interest rate as well so just another thought yeah that's a good suggestion um i'm curious to know like when you talk to garrett about you know if you're not good with money and it comes your way and then you spend more than what you have how can someone then begin to assess like how do i reshape my money personality the associations that i have with money coming in or going out do you guys have any thoughts on you know just from your own life experience how you've worked through your your money your relationship with money and how it's grown and changed over the years and how you've overcome like little hiccups that you know maybe at one point in your life kept you stuck or not as liquid well i used to be a miser um and i think garrett and i can both agree yeah when i was growing up i lived off peanut butter and miraculous sandwiches because that's what was in the fridge and that's what i ate and i kind of carried that into adulthood and that just you know that personality just you know permeated everything that i did you know when i would buy christmas gifts for my kids i would literally go to deseret industries which is a local goodwill you know place here and just buy you know spend a couple dollars on their on their christmas presents because who needs really nice christmas presents is my thought process and so that you know it wasn't until i met garrett and started realizing that i was really caught up in that scarcity mentality that miserly mentality that i you know realized that i needed to shift and so um that that's kind of been a transformation it doesn't happen overnight yeah but but i had the opposite problem of you know having no debt but you know not spending any money on myself so i could talk about this for several days um as you know we're going on a little play around this topic but most people are trapped in a losing game and that losing game happens when they put money above all else a lot of times they see money as power and the more money i have or the more things i can buy the better i am the more other people will like me or the more i can show off i mean there's or the safer i'm going to be like there's these different games so the first shadow persona of money is the miser that that dell talked about which is playing a game called preservation it's scrimping saving sacrificing delaying deferring so that one day someday they'll have funds they never spend right it's just what can i do to save what can i do to eliminate then you've got the conservative which is they're a little bit more of an investor where they're going to put money into retirement plans but they're going to try to save the highest percentage of their retirement fund into their retirement funds through delayed gratification delayed happiness and they're kind of condescending they think they know everything you know dave ramsey is the perfect example of that then the third thing is we have strivers these are the people that hustle and and they try to scale and they work harder at all costs and they play a game called status which is like hey do you like me now look at all the stuff i have and then there's the high roller which is the last money persona which plays the game called opportunity they win big but they lose big there's a lot of kind of body bags after they're that they're gone of people that have lost their life savings and you know it was these high promises so those are the shadow personas of our money personality and if we're stuck in the consumer condition looking to take more from the world than we give to it if we think that someone owes us something if we think that profit is evidence of deception if we think that fear doubt and worry is going to help us out with our finances or we don't want to pay attention to our finances prosperity is only a game of responsibility and what it takes is a hard look and say why am i spending am i spending because i don't feel lovable am i spending because you know um i i want something because i feel i deserve it because i've worked so hard but even though the money's not there i'm going to do it anyway like i grew up in a coal mining town where people had to sell their truck but they kept their boat because i worked so hard in the coal mine i deserve that boat and so those types of notions are about outward spending versus inward reflection or investing in ourselves to get clear about how can we produce more value how do we deliver more to others how do we solve problems how do we serve others and then we can flip to this place of vision value creation and discover our hidden capital our hidden capital is our mental and relationship capital and when we invest in our mental capital we have ideas knowledge and skills that can serve other people and actually dollars follow that value that we create but we have to heal from this losing game of trying to impress others with our money and trying to buy ourselves happiness instead of like finding happiness within and so it's it's a big question still but as you know um we've got a few videos on it we got a book coming out on it so i i just think that we when we can stop thinking like we're unlovable unworthy you know or any of those uns and we can just embrace like a life that we love based upon us creating a game worth winning creating a game where we serve others and we solve problems and it's consistent with who we are and what we want to what we want to achieve in the world not at the expense of another but by complementing another it's a completely different world so look that's a great final question to turn your thoughts into profits and to build the life you love if you go to wealthfactory.commegakit we've got a cash flow guide that you can download plus my book killing sacred cows which helps you identify scarcity in your life and instead embrace more abundance and even another book so there's two books and a guide it's on me just give me your email so we can stay in touch and we'll add value to your life want to continue the path to be a better investor make sure that you're not losing money and taking too much risk well click here and learn 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Channel: Garrett Gunderson

Views: 3,395

Rating: 4.9480519 out of 5

Keywords: Garrett Gunderson, Wealth Factory, Wealth Building Strategies for Entrepreneurs, Financial Freedom, Financial Independence, Getting to economic Independence, what would the Rockefellers do, business, success, entrepreneurship

Id: Y9QUkRrvUmg

Length: 49min 21sec (2961 seconds)

Published: Mon May 24 2021