Recently Dan posted about the 3 Major stages of wealth building. Today we'll take a closer look at that first step, paying off 3rd party debt. There are a variety of techniques people utilize to accelerate debt payoff, including: 1. Restructuring/Refinancing for lower rates
2. Making extra payments to principle 3. The "Debt Snowball" method 4. The "Debt Avalanche" method 5. The "Cash Flow Index" method 6. Recapturing Debt through IBC
How does one know which is the best approach for his own situation? While the answer depends on your goals and risk tolerance, it is clear that some techniques may get you to where you want to be before others. For example, many people utilizing the extra payments method decrease their cash flow, which may put them in a precarious position. This also limits their ability to have their money working for them rather than someone else. There is one major difference between methods 1-5 and debt recapture: only debt recapture through IBC can leave you with a larger account when the debt is paid off. All other techniques result in payments that leave your family never to return. By using infinite banking, you can effectively move this debt into your personal family financing system, paying off your 3rd party creditors and leaving you with more flexibility on when, and how, you pay back your policy loan. In some instances, a combination of techniques may be appropriate. For example, if one does not have a large enough cash value to immediately take over all 3rd party debt, or if the outstanding debt is at 0% for an extended period of time. In these and other situations, it may be appropriate to tackle the most hindering debt through IBC. The "Cash Flow Index" method is a simple technique to help you figure out which debt this may be.
Instead of thinking in terms of the debt which has the highest interest rate, or the highest payment, the Cash Flow Index method helps compare debts to see which one most affects your cash flow through its inefficiency. To find the debt most inhibiting your cash flow, simply divide the Loan Balance by the Minimum Monthly Payment.
The debt with the lowest Cash Flow Index (CFI) number is the one which is most prohibitive to your current cash flow, and may be the one you want to direct attention to first. By eliminating this debt (either through recapture or early payoff) your overall cash flow will improve more readily than by focusing on debts that have a higher CFI. It may even be helpful to reduce your payments on all other debts to their minimum monthly payments in order to knock the most inefficient one out sooner.
In summary, one should first determine which debts are best to recapture in their family financing system, which will likely be those with low CFI scores. Then one should implement efficient strategies to help pay off other debts that cannot be immediately recaptured. Generally speaking, since recapturing debt is superior to simply paying debt off, one should focus on building a larger family financing system to recapture it rather than lose money to 3rd party creditors.