The math your banker would rather you didn't run
Most households sequence debt by interest rate or by emotion. Both leave money on the table. The Debt Efficiency Ratio is a third lens, quieter and more useful, that tells you which obligations are actually choking your monthly cash flow. We work through it with every member of the community before we touch anything else.
Balance ÷ Monthly Payment = Debt Efficiency Ratio
Which debt is actually trapping your cash?
Interest rate tells you what debt costs you over time. The Debt Efficiency Ratio tells you what it costs you this month. For most households, that second number is the one quietly running their life. The framework is three steps. Anyone can do it in one sitting. Almost no one bothers.
List and classify each obligation
Mortgages, vehicle loans, lines of credit, student debt, business notes. For each, identify the structure first: is it amortized (principal plus interest, the balance is being retired) or interest-only (the balance stays, you're carrying the cost)? The two read very differently through this lens. Then capture balance, monthly payment for amortized, or rate for interest-only.
Score the amortized side
Divide balance by monthly payment. That's the DER. Higher numbers mean the debt is efficient relative to what you're paying. Lower numbers mean the debt is dense in cash flow per dollar owed. Interest-only positions don't get a DER score — they're read separately, by purpose and rate.
Re-sequence
Sort ascending. The lowest scores are usually the ones to retire or restructure first if liquidity is the goal. The highest scores often deserve to stay exactly where they are. The flagged positions get their own conversation.
The formula, and the four tiers it produces
It's deliberately simple. Simple enough that you can do it on a napkin, which is part of the point. The output sorts your debt into four useful buckets. Three are mechanical. The fourth is where the real strategy work happens.
Loan Balance ÷ Monthly Payment = DER
Address first
These positions consume disproportionate monthly cash relative to balance. Restructuring or accelerated payoff here typically frees the most liquidity per dollar deployed. Credit cards, short-term consumer loans, dealer financing.
Examine carefully
Middle ground. Worth weighing alongside rate, term remaining, tax treatment, and whether the obligation supports an income-producing asset. Typical territory for vehicle loans, equipment financing, shorter mortgages.
Often leave alone
Efficient debt by this lens. Frequently the long-amortising mortgage. Generally appropriate to maintain while attention goes elsewhere — though see Chapter Three before assuming the mortgage is settled.
Flag for separate review ↗
Readvanceable credit, tax-deductible interest, investment-leveraged positions. The DER alone misreads these. They aren't more or less urgent — they're playing a different game, and they need their own conversation.
Where the simple lens stops working
The DER is a starting point, not a destination. There are at least three situations where the score on the page is materially misleading, and where acting on it without thinking would be a mistake. Sophisticated households need to see these before they sequence anything.
The mortgage problem, the readvanceable answer, and the cost of interest
A common objection, and a fair one: the mortgage scores high on DER and the framework says leave it alone, but the dollar cost of mortgage interest paid over thirty years is enormous. Why wouldn't I extinguish that first? The answer is that the question is structured wrong. With the right instrument, you don't have to choose.
1. Interest cost is a different lens entirely
The DER measures monthly cash flow density. It says nothing about total interest paid over the life of the obligation. A 30-year mortgage at 5% can quietly cost more in cumulative interest than the original principal. If your goal is total wealth preserved, that calculation has to run alongside the DER, not after it.
2. Readvanceable credit changes the math
If your mortgage is readvanceable (HELOC-attached or sub-account based), every dollar of principal you pay creates a dollar of available credit. You haven't extinguished debt. You've converted amortising debt into flexible credit that can be redeployed for tax-deductible investment, opportunity capital, or liquidity reserve. That changes the sequencing entirely.
3. Tax-deductible interest isn't equal interest
An investment loan or business-purpose mortgage carrying deductible interest costs you less, after tax, than the rate on the page suggests. The DER doesn't see deductibility. Two debts with identical DER scores can have wildly different effective costs depending on how the interest is treated.
4. The right move is often a structure, not a choice
Strategies like the Smith Manoeuvre in Canada, or interest-only investment loan structures elsewhere, deliberately exploit the gap between the DER lens and the interest-cost lens. They aren't loopholes. They're applications of structuring that the DER alone can't generate but can help you identify. This is why the fourth tier exists.
Why liquidity is the variable that quietly governs everything
Monthly cash flow is the resource that determines what your household can do next: invest, restructure, weather a market, take a sabbatical, hold a position long enough for it to mature. Almost every meaningful financial decision is rate-limited by it.
Optionality compounds
An extra two thousand dollars a month isn't just two thousand. It's the option to invest, to wait, to refuse a bad deal. Trapped cash flow narrows every future decision.
Time, brought forward
Retiring a low-DER position eighteen months earlier means whatever comes next compounds for eighteen months longer. The order of operations isn't trivial. It's most of the result.
Debts interact
A mortgage, a vehicle loan, a line of credit, and a business note are not four separate problems. They are one weather system. The DER lens shows you how it actually behaves.
Math, not feelings
The popular advice optimises for psychology. That's fine if motivation is the bottleneck. If liquidity is, you need a different lens. This is that lens.
Visible progress
DER is trackable quarter to quarter. Watching the household score climb is one of the more honest measures of structural progress that I know.
Decisions before signatures
Should you pay down the line of credit or fund the contribution? Buy the rental or retire the vehicle note? Run it through the lens before anything is signed.
How to actually use this
A short field guide. Print it, sit with it, then bring it to a conversation.
Before you run it
- Have you gathered every monthly fixed obligation, including the ones inside business entities?
- Have you flagged any readvanceable, deductible, or investment-leveraged positions separately?
- Is liquidity, rather than rate, the binding constraint right now?
- Would freeing five hundred to two thousand dollars per month meaningfully change your options?
While you're reading the output
- Which position has the lowest DER, and is it the one you expected?
- Where does the lens disagree with the rate-based answer? That gap is where the real decision lives.
- Which obligations are tax-deductible, and how does that change the picture?
- Is there a position that could be refinanced into a higher DER overnight without changing balance?
Questions to bring to me
- If we retire this first, how does the freed cash get redeployed?
- Should we look at a readvanceable structure on the mortgage rather than accelerated payoff?
- Where does payoff sequencing beat investing or saving for our specific position?
- How does the debt sitting in our entities compare to what's in our personal name?
Translate cash flow into structure
The DER lens is the entry point. Most conversations inside the community flow from there into tax positioning, estate structure, and longer-horizon allocation.
A note on scope
The instruments on this page provide educational frameworks to help you analyse your own position. They do not constitute personal financial, tax, or legal advice. Outcomes depend on a wide range of factors including interest rates, tax circumstances, household composition, and goals that no calculator can fully see.
The Strategic Wealth Network is a private community led by Henry Wong as Wealth Structurist. Where formal investment, tax filing, or legal services are required, members are referred to or work alongside the appropriate licensed professionals. Nothing on this page should be construed as a recommendation to buy, sell, or hold any specific instrument or to enter into any specific structure.
How much liquidity is quietly trapped inside your structure?
Run the numbers yourself. Or bring them to a conversation inside the community, where the rest of the picture comes into view.
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