Should You Use Cashflow Index Or Velocity Banking To Get Out Of Debt? |
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- čas přidán 21. 06. 2023
- Recently I decided to SMASH my debt once and for all! So I researched many methods and found a couple that are pretty awesome. I will put them head to head in today's #ProsperityTips episode!
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# replay Ray Fort Myers FL
This is amazing!!! I love this❤❤❤
Thank you!
Good job on highlighting the limitations of Velocity Banking. It should indeed only be used when you can replace higher interest loans with lower interest ones (too many VB proponents advocate the opposite, such as using a CC to pay off low interest mortgages which is silly)
On the cash flow index I have reservations. As an example, assume you have 2 debts
A: $24 000 at 20% interest minimum payment $400 per month.. Index is 60
AND
B: $24 000 also but this one at 0% interest minimum payment $1 000 per month. Index is 24
Also assume you have $1 000 extra per month which you can use to reduce debt
Cash flow index tells you to pay off debt B. You'll have paid it off in one year (you'll be paying the $1000 minimum + $1000 extra per month for a total of $24 000 in a year)
At the end of the year your total debt will be $24 000 (debt A) + $4 800 (interest on debt A) - $4 800 (payments made on debt A) = $24 000
You will have paid $24 000 (reimbursement of debt B) + $4 800 (interest on debt A) = $28 800
If instead you use your money to pay off debt A. You'll be paying off $1 400 per month ($400 minimum payment + $1 000 extra per month) on debt A and also reducing debt B by $1 000 per month (minimum payment)
At the end of the year your total debt will be
$12 000 left on debt B + $12 000 left on debt A after the extra $1 000 monthly payment reduced by a further $1 200 (give or take depending on payment dates) due to owing less interest since your average balance is lower, i.e total debt is $22 800 ($12 000 of debt B at zero % and $10 800 of debt A at 20%)
You will have paid $12 000 on debt B (minimum payment) + 12 x $1 400 = 16 800 on debt A for a total of $28 800 (just as above)
So paying off the debt with the higher interest rate first is $1 200 better. (interest saved on debt A) in this scenario than using the cash flow index
Ya. I think putting anything with 0% makes sense to put last. Cashflow index is just a good guide that I think is better than snowball. But ya sometimes it’s good to evaluate each situation individually vs a blanket method for everyone.
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He thinks 11% or 28% credit card is worse than 4% or 5% amortization loan, example if your credit card say the worse 28% on a 10k credit card 28% on a 10k card is based on the balance and that year only So the interest would be 2800 for the year divide that a mnth it would be 233 if you kept it max the whole year and only paid minimum.. let's do a car loan for 10k for 5 years at 5%... let's do the math it would be 10000 x 0.05 =500... so 500 times the length of the loan, which is 5 = 2500 that would be the total interest for the loan u see 5% amortizated interst is 2500 and the credit card at 28% is 2800