Cash Flow Index Counselor Presents His Best CounselA professional financial counselor’s advice to a young woman who feels like she is drowning in debt. Counsel based on Dale Clarke’s Cash Flow Index idea.


Yesterday, I summarized the predicament of Liza, The Girl with the Three Loans. I asked you, considering Liza’s circumstances, to think about what she should do (or should have done) to address her seemingly hopeless situation.

Today, I share the advice of Tim Cardon, an advocate for Dale Clarke’s “Cash Flow Index.”1 It was Mr. Cardon who told me Liza’s story. He hoped it would help me understand and embrace the value of CFI.

Since Liza was bleeding $100 a month, said Mr. Cardon, she needed more positive cash flow. And while paying off the loan with the highest interest rate would have reduced her expenses faster, sometimes people need great cash flow  instead of lower expenses. And that, he said, was certainly true in Liza’s case. . . .

When people like Liza are stuck in negative cash flow situations, paying off the loan with the lowest CFI produces more cash flow quicker. And when they create positive cash flow, “it doesn’t just give them cash flow, it also gives them . . . peace of mind . . . [and] hope. They can breathe easier with more cash flow and they are therefore better at their jobs, businesses, relationships, etc.”

By helping Liza reduce her negative cash flow by $325 a month, said Mr. Cardon, he helped Liza enjoy all those wonderful benefits.

How’d he do it?

The Solution Mr. Cardon Proposed

First thing he did: He drew Liza’s attention to her $15,000 IRA and suggested she cash it in.

Even after she took a 25% hit (10% penalty and 15% tax) [for taking an “early withdrawal”], she still had $15,000 x .75 = $11,250.

I told her to use the $11,250 to pay off the $11,000 car loan instead of the student loan or credit card because it was her fastest path to cash flow. . . .

I told her to pay off the car so that she could get ahead on cash flow by [$325] a month.

. . . [If I had] done the same thing with the credit card payment, . . . that would have saved her the most interest. But it would not have gotten the most cash flow.

She was breathing way easier with the thought of having $225 extra at the end of the month instead of having $50 extra at the end of the month.

[To ensure there’s no misunderstanding: Liza’s monthly shortfall of $100, counterbalanced by a net reduction in monthly car payments of $325 = “$225 extra at the end of the month.” The shortfall of $100 counterbalanced by eliminating a monthly credit card payment of $150 would equal “$50 extra at the end of the month.” —JAH]

“If she had positive cash flow when I talked with her,” said Mr. Cardon, “our conversation would have been completely different. [When you have positive cash flow,] cost of money becomes much more relevant and the focus. We would have then been able to make sure she built a solid foundation of [savings to cover] six months of expenses and then taught her productive ideas like Cash Flow Banking.”

Mr. Cardon sought to bolster his case for increased cash flow:

If I was just wanting her to pay off all of her loans then it may have made more sense to have her pay off the (roughly) $7,500 credit card debt and use the rest of the money to pay off part of the student loan. Then she could have used the $150 in monthly savings from the credit card to pay off the rest of the student loan faster. But this way she only freed up $150 a month in cash flow immediately instead of $325 a month. And she really had a cash flow need.


[W]ith each client, I look first and foremost at their cash flow. If that is strong, then I focus on liquidity [the client’s ability to withstand unexpected heavy cash flow needs—loss of a job, major appliance breakdown, hospital visit, etc.].

If both cash flow and liquidity are strong then cost of money becomes a much more important part of the conversation, and paying off the highest interest rate loan starts to make a lot more sense.

What do you think? Did Mr. Cardon give Liza good counsel? Why or why not?

1 “Cash Flow Index” or CFI is calculated by dividing the Remaining Unpaid Principal on a loan by the Minimum Monthly Payment. So a loan with $10,000 of Unpaid Principal and a $350-per-month Minimum Payment (Liza’s car loan) yields a Cash Flow Index of 28.57. A loan with $7,500 Unpaid Principal and a $150-per-month Minimum Payment (Liza’s credit card) yields a CFI of 50. —Return to text.