The avalanche method optimizes the wrong number

In August I paid off my car loan. The interest rate was 5% on ~$6000, with 22 months left on the term.

I used a line of credit with an interest rate of 10% to do so.

I paid the car anyway. The reason is the same one I wrote about two weeks ago.

Debt payoff advice usually presents two options. Either method is simple enough. List your debts, pay the minimum on all of them. After that they have different priorities:

The arithmetic is correct and both work. But both ignore monthly cash-flow, which is what I’m optimizing for.

What stands between me and the next Amplicon is monthly cashflow, and the avalanche has nothing to say about cashflow. This is where the cashflow-first payoff order comes in.

Two weeks ago I wrote that a rate is not a cost. It is a price per year on a balance. Same idea, pointed the other direction: the rate tells you what a debt costs you, the payment tells you what it takes from you every month. Those are different numbers, and they rank your debts differently.

I took this a step further.

Suppose a friend asked you for $6,000 promising to pay you 12% interest over 3 years. This equals a payment of slightly under $200. If you were certain this friend would pay you back on schedule, the investment is a no-brainer.

Well that’s what I did. As the banker on this loan, I am on the hook to pay back $200 every month to myself for 3 years. This is possible because I freed up $285. And since it’s my own cash, I also don’t pay taxes in the process.

Every month, the payment leaves my account on schedule and funds the Amplification system.

That is all "be your own bank" means. It sounds exotic and it is not. It leverage simple psychological tricks to keep more of your own money.

I have written about how these work. I have never walked one through end to end. Here is the August cycle in full.

$40,000 off the lines of credit at 8.65% blended rate (I have multiple lines with different interest rates).

Both $QQQI ( ▼ 0.04% ) and $SATA ( ▲ 0.24% ) payouts are created by cashing the dividend and selling part of the principal to achieve an amortized payoff. I wrote about how to do this a few weeks ago.

This adds $1,130 to my monthly cash flow totaling north of $6,300 from my system alone, which will allow me to pay down the $40,000 in less than 4 months (when including my personal savings).

Engineer your future. Amplify your wealth. Live your way.

— Miguel

Sometimes, yes. The avalanche method says always clear the highest rate first, which minimizes total interest paid. But a car loan with a large fixed monthly payment frees more monthly cash flow per dollar cleared than a revolving balance at a higher rate, and you cannot redeploy interest you saved. The cashflow-first payoff order suggest clearing that to redeploy a payment you freed.

Total interest paid over the life of your debts. It ranks by rate and ignores the size of the monthly payment, which is the number that determines how much you can invest each month.

Divide each debt's monthly payment by its balance to get the payment freed per dollar cleared. Rank on that number if your goal is monthly cash flow. Rank on rate if your goal is minimum total interest. Fixed-schedule loans like car loans and personal loans usually rank higher on the first measure than credit lines do.

Two cases. Small balances at punitive rates, because they free almost no cash flow and bleed fast. Any payoff that drains your reserve and your available credit at once.