Tuesday, January 23, 2007

Cash Flow MGMT: Debt Repayment

Cash Flow is King!

Most folks I have worked with have never learned about cash flow and how important it is to your financial position. Whether you are building wealth or just living day to day. It is the blood of the financial body.

Today I am writing to those who have been struggling with debt repayment.

For the many years that I have been giving my clients financial advise I have been showing them a strategy for paying off debt that I developed when I was starting out. I read or heard that the best way to pay pay off debt is to start with the highest interest rate debt and work down from that. What if you lose your primary source of income however? Then how do you pay your $400.00 car payment. I can always come up with the $15.00 or $50.00 to pay the credit card minimum, but I will lose my car if I don't pay that note. So I started thinking about my situation and if the prevailing debt repayment wisdom made sense for me. I came to the conclusion that it did not.

The pay your highest interest first mantra makes sense if you have only credit card debt. If however, you have many debts such as student loans, car loans, personal loans and credit card loans, then it makes more sense to take a different road. Being financially free has to do with being in control of your financial position. If you lose you earned source of income, what will you do? So, start with the largest monthly debt requirement (i.e. a car payment). pay off that debt and then work your way down. If your credit card debt is much larger than the rest of your debts, then email me and I will be more than happy to discuss a strategy tailored to your situation.
Example:
Monthly Income = $1,000
Car Payment = $400 + 760
Student Loan = $200
Credit Cards = $160
Month End = $0.00
Take the burden of the largest monthly requirements off your shoulders as soon as you can. This frees up your cash flow giving you more control. If you get yourself into financial strain you can better handle the smaller payments even if you are building up more interest. At least you can get yourself in a position where you are able to meet your monthly obligations, which is much better than defaulting on any of them. If you have a substantial amount of high interest debt (much more than any other debt) you maybe better off getting that down to a more manageable level. However if you have substantial high interest debt, then it may be your largest monthly payment anyway.
I developed this strategy when I got out of college because I wanted to feel more in control of my current and future financial position. My thinking during that time was that when I have the big monthly requirements knocked out, I will be closer to financial freedom. No matter what, I can pay the minimum on the smaller stuff. Then one day it was all paid off. That is where you want to be-that is real financial freedom. There are of course more aspect to financial freedom and I will write about them in time.

Have a productive day,

Jake Blake

3 comments:

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roman said...

cash is the king in any market enviroment as well!!!

Marisa said...

Good words.