The girl with the three loans

Three loans weighing her down; which should she pay off first?

A nuts-and-bolts, real-life analysis of how to counsel someone who feels like she is drowning in debt. How can she escape the rip tide?

Today, I will set up the situation. In future posts, we will consider possible solutions to her problems.


A few weeks ago I described three proposed methods or approaches to pay off consumptive and destructive liabilities.

I closed with a presentation of Garrett Gunderson’s “Cash Flow Index” (CFI). He said he urges people who are in debt to determine which loans are least “efficient” . . . and to pay them off first.

I wrote to Dale Clarke, the man who developed the CFI, to express the concerns I expressed in my post.

One of Mr. Clarke’s associates, Tim Cardon, responded. He was concerned that I misunderstood the CFI concept. “[W]e aren’t using it as a pay-off-all-of-your-debt strategy,” he said. “We are using it to create cash flow quickly for clients who are in desperate need of cash flow. Paying off the highest interest rate doesn’t always save them enough cash flow to get back to positive or have some breathing room.”

In other words, it may make sense to pay off higher-interest loans if your goal is simply to pay off loans as quickly as possible. But if you have a need for cash flow, and you have a number of loans you are trying to pay, then you need to look at the various loans’ payment requirements to determine which one has the lowest balance compared to its monthly payment schedule. CFI will help you spend the least amount of money to produce the highest net positive cash flow every month going forward.

Mr. Cardon attempted to illustrate his point with the story of a young woman he had counseled.

He referred to her as a girl. So I will do the same. And I will give her a made-up name: Liza.

The Girl with the Three Loans

Facts of the case:

  • Liza was making about $40,000 a year at her second job since college.
  • She took the job because there was good growth potential that didn’t exist at her first job and it paid $300 to $400 a month better than her old job in a smaller, cheaper city.
  • She loved her job and saw it as a great opportunity.


  • Housing in the new city was expensive, so she was losing money—about $100 on average—every month.
  • She had squeezed her expenses as much as she felt capable.
  • She had very little savings (able to cover barely a month of expenses), and she was slowly depleting those funds.
  • She had three outstanding loans—
    • A car loan with an $11,000 balance and a $350/month payment. I think the interest rate was in the low single digits: 3.9%.
    • $7,500 in credit card debt that required a monthly payment of $150 (and was costing her 14.9% in interest).


    • A student loan that required a monthly payment that, if I recall accurately, was less than the minimum monthly payment for the credit card and that cost 6.9% in interest.
  • She had about $15,000 in an old IRA.
  • Her new company did not offer a 401(k) or any other qualified plan.

Question: What should Liza do?

What counsel would you give her . . . and why?