Debt is NOT a 4-Letter Word

Bills. We all have them in one form or another. I used to hate bill paying day.  I dreaded it and would curse about seeing all my hard-earned money slowly and surely be spent away. It felt like we constantly took 1 step forward and 2 steps backwards.

Debt can be crushing, it can be debilitating, but it doesn’t have to be a dirty 4-letter word (you know the ones I mean! Lol 😊)

How People React to Debt

There seems to be 3 ways people react to being in debt.

The 1st type accepts as fact that they will always be in debt, so their reaction is ambivalence. They ignore it. They literally bury their head in the sand like the proverbial ostrich. They have the mindset that if I pretend it doesn’t exist, I don’t have to deal with it.

The 2nd type abhors debt in all its forms. They curse about the debt they are in and will stop at nothing to absolve it. They have the mindset that all debt is bad and should be exorcised like a demon in a bad horror movie.

The 3rd type has a different mindset. They understand that debt can be both good and bad depending not only on the type it is but also how it is used. Debt can be both friend and foe. If used properly, debt can be used to enhance wealth on a person’s way towards financial independence. If not used properly, debt can sap cashflow as well as net worth.

What is Debt?

It’s critical to understand the difference between debt, liability, and expenses.

From a business accounting standpoint, the best way to view this is to create a balance sheet and income statement. For those of you not familiar with this, a balance sheet simply lists in 2 columns all the items you own (assets) and all the items you owe money on (liabilities). This is from an absolute perspective.

For example, if your home is worth $300K and you owe a mortgage of $180K, then the $300K is listed in the assets column and the $180K is listed in the liabilities column.  Do this for all the things you own and owe money on.

If you have more assets than liabilities (Assets > Liabilities) then you own equity and have a positive net worth. If you have more liabilities than assets (Liabilities > Assets) then you have debt and have a negative net worth.

An income statement lists in 2 columns all the items that generate income and all expenses accrued on a monthly or annual basis.

For example, a salary from a job is considered income. Rent from a vacation home is also considered income. On the flip side, a car payment is an expense as well as the mortgage, taxes, and utilities on the vacation home is also considered an expense.

If there is more income than expenses (income > expenses), positive cash flow is created. If expenses are greater than income (expenses > income), negative cashflow is created. Negative cashflow is what a lot of people call debt.

It is possible that a person has a positive net worth (owns equity) yet spends more than they make (negative cash flow).

When people say they are in debt, what they really mean is that their expenses are greater than their income (negative cash flow). To offset this, people will either draw down savings or spend more on credit cards. For our purposes and to get in the right mindset, we will be substituting the term “expenses” for “debt”.

We’re taught to believe that all expenses are bad and to cut them as much as possible, but that perspective is a little misguided. Our goal shouldn’t be to pay off all expenses as fast as possible, but to maximize the efficiency and production of cash flow.

By maximizing cash flow, a person can use the extra money generated for a variety of purposes from buying more assets and generating additional income to paying down outstanding expenses. Maximizing cash flow creates options. Options are always a good thing.

The 4 Types of Expenses

Per Garret Gunderson’s article,  there are four types of expenses a person needs to be aware of.

Destructive expenses. These are the expenses that should be eliminated 1st. These include consumer debt from non-value added items, personal vices, streaming services that haven’t been used in 6 months, the gym membership you don’t use, using credit cards to buy expensive clothes and eating out, etc. Anything that is wasteful and subtracts value from your life is open for removing from your life and budget.

Lifestyle (consumptive) expenses. These expenses include dining out, vacations, concerts, etc. — fun expenses that help you build memories and rejuvenate you.

Here is where Garrett and I differ.  While I agree that anything that allows a person to be rejuvenated and increase overall production should be protected, there must be a limit especially if that person is spending more than is being made. For example, if you’re spending $800 / month on eating out, this should be seriously looked at and possibly reduced. If you’re annually spending $5,000+ on vacations, investigate ways to more efficiently spend your time while still rejuvenating yourself and creating lasting family memories.

For example, my son and I have our annual vacation where he and I get away to spend time with each other (our “mancation” lol 😊). Our relationship really improved once we started doing these outings, so I deem it as a lifestyle expense. To minimize costs, we do outdoor adventures like camping and hiking. Not only is this a great place to spend time together, it is relatively inexpensive. All you need is a tent, food, and gas for your car.

Recently, he has been trying to convince me to book a week in the Grand Caymans for a snorkeling trip. While I love his thinking and would love to do this trip, it is not in our budget for the foreseeable future. The money I would have used on this trip would be better used for other things for my family at this time.

Lifestyle expenses need to be managed wisely and NEVER use credit cards to pay for it. Once credit cards are used, lifestyle expenses turn to destructive expenses. Live within your means and ALWAYS use cash to pay for them.

Protective expenses. These are the expenses that protect your property, your life, and your health. Affluent people don’t compromise with their protection. The reason is that protective expenses help make a person more productive by freeing their mind from the worry and stress that comes with uncertainty. With a safety net of protection, a person’s cashflow and wealth can grow significantly since they can focus their energy on optimizing production and creating value.

One example of a protective expense is your emergency fund, which should be enough to cover a minimum of six months of expenses.  Other protective expenses include life, medical, home, and auto insurance.

This is a financial area that often gets overlooked. Unfortunately, the lower and middle classes tend to minimize this area of their life to save money. The risk is that with one bad accident or lapse in judgement, years of hard work and savings could be gone in an instant.

An example of this happened to my neighbors, they underinsured their home to save money. When a fire broke out and destroyed their garage, the policy did not cover the damages and they found themselves having to pay over $30,000 to rebuild the garage.

Use protective expenses to maximize protection, minimize stress, and optimize production. It is how you protect & safeguard your family, your productivity, and your way of life.

Productive expenses. Productive expenses are how you make money. These expenses symbolize the adage, “spend money to make money”. Productive expenses allow you to build assets, expand your cash flow, and grow your business. Essentially, if spending $1 enables you to make $2 or more, this expense is productive.

Examples of this are anything from purchasing rental property or hiring a great employee to a gym membership and getting an education. These are expenses that are going to allow you and your business to operate at peak performance as well as enhance your life now and in the future.

To implement this strategy, first list all your monthly expenses and then categorize them based on the 4 types we just went through.  Use this categorization to identify the destructive expenses and work to eliminate these first.  Next use the Cashflow Index to identify the order to pay off these expenses.

The Cashflow Index and How It Works

A tool in your toolbox that can be used to prioritize spending and optimize cashflow is the Cashflow Index (CFI). It was invented by Garrett Gunderson’s team as a scoring system to identify loan efficiency and cashflow recovery optimization. The scoring system identifies and prioritizes the most inefficient loans that are to be paid off first followed subsequent lower priority loans.

It is better than other methods (i.e. pay off highest interest 1st, snowball method, avalanche method, etc.) because the other methods will eventually pay down the debt accrued but it does necessarily optimize cashflow along the way. Cash Flow Index works so well because it systematically eliminates debt while allowing enjoyment of your money along the way.

Here’s how it works:

Take the balance of each loan and divide it by the minimum monthly payment. The higher the number, the more efficient the loan is. The lower the number the more inefficient the loan is.

Cash Flow Index = Total Loan Amount / Minimum Monthly Payment

Whichever loan has the lowest CFI number is to be paid off first followed by the loan with the next lowest CFI number, etc. until all the loans are paid off. By paying off the inefficient loans first, cash flow is freed up to work on paying off the other debts faster.

To reinforce the philosophy, look at the following example Garrett talked about in his article:

Credit Card:

Balance: $20,000

Interest: 15%

Minimum Monthly Payment: $300

CFI: 67


Car Loan:

Balance: $20,000

Interest: 8%

Minimum Monthly Payment: $500

CFI: 40


Home Loan:

Balance: $100,000

Interest: 4.5%

Minimum Monthly Payment: $1000

CFI: 100


Personal Loan:

Balance: $15,000

Interest: 3%

Minimum Monthly Payment: $100

CFI: 150


Using CFI, the loan payoff should be paid off in the following order:

  • Auto Loan
  • Credit Card
  • Home Loan
  • Personal Loan

I have been personally using this method for the last couple of years and have had great results. The cashflow freed up has really sped up the payoff process on my own loans and highly recommend trying it. In the past, I used the snowball method and find this method a better way to optimize loan payoff and free up cash. I like this method because CFI not only considers the monthly payment, but also indirectly the interest rate. The minimum monthly payment is set by considering payoff amount, interest rate, and term length. By dividing against the loan amount, it tells me which loans is the most inefficient using interest rate and loan terms as the prevailing criteria. In other words, it tells me where I get “the most bang for my buck”.


When you understand the difference between the various type of expenses you begin to see the options. The way to becoming wealthier is to eliminate destructive expenses, optimize lifestyle / protective expenses, and increase your productive expenses. Understanding how to do this will optimize your cashflow, minimize your stress, and accelerate your journey towards financial independence. Debt doesn’t have to be a 4-letter word …. just used in the right way. Use this knowledge to not only achieve financial independence but enjoy your life along the way.

Live the Life You Want, Love, and Deserve! 😊