Several years ago, my husband and I got out of debt.
We did so largely by following Dave Ramsey’s baby steps and going gazelle intense.
I worked lots of side jobs, and every single extra dollar went on our debt.
I found the process a bit frustrating, however, because we only had a $1,000 emergency fund, and when big expenses that were more than $1,000 came up, we didn’t have the money to cover them and had to go back in debt.
That two-steps-forward-one-step-back shuffle really frustrated me.
We were out of debt for several years, but over the last two years, we had a series of medical issues arise with our children, and we went back into debt to pay the medical bills and therapies.
Now things have stabilized, and we’re once again working our way out of debt, but this time, we’re not throwing all of our extra money at debt.
Why We’re Not Putting All Of Our Surplus Money On Paying Down Debt
There are several important reasons why we’re not putting all of our extra money on paying down debt.
We Wanted A Bigger Emergency Fund
We have three kids, two of whom have medical issues, a house, and two cars, one of which is 14 years old.
This year alone, we’ve had several issues that cost more than $1,000 including a $2,500 car repair, a $1,400 dental procedure, and another $1,700 dental procedure.
To avoid going further in debt while we try to get out of debt, we’ve decided to gradually build a bigger emergency fund WHILE paying off debt.
Then, we will have money to pay out of pocket when these large expenses come up, and we won’t derail our debt repayment plan or even worse, go further into debt.
No More Two Step Shuffling
To me, nothing is more frustrating than paying off a large chunk of debt only to incur a smaller debt because I don’t have money to pay for an emergency because all of the additional money was allocated to debt.
I’d much rather pay down my debt more slowly, but continually make progress than zig-zag through my debt repayment process.
Plus, the more we can make our finances solid by having an ample emergency fund and sinking fund for irregular expenses like car repairs, home repairs, and medical bills, the less likely we’ll ever have to go back into debt again.
How We Pay Down Debt
We’ve been using a formula to simultaneously pay down debt and save money.
Any extra money that comes our way, whether from a windfall or extra work, is divided. We put 40% on debt repayment and 60% on building our emergency fund.
If we ever have a time when our emergency fund dips below $1,500, we stop the 40% debt repayment and allocate all of the surplus money to replenishing the emergency fund until it is back to at least $1,500. Then we go back to our standard ratio of debt repayment and building the emergency fund.
Once we hit $5,000 in the emergency fund, we’ll put all of our extra money on debt repayment.
Eventually, we’d like an emergency fund of three to six months’ living expenses, but we’ll wait on that goal until our debt is paid off.
I’ve been surprised that even though we’re not throwing all of our extra money at debt repayment, we’re still making steady progress. This makes me feel better because I know we’re also simultaneously building an emergency fund and making ourselves more financially secure.
If you’ve had debt, did you throw all of your extra money at it, or did you also make sure you had an ample emergency fund? Which technique would you recommend?
Greg Magnus says
Great thoughts on emergency funds and debt. It is a hard choice and likely specific to the individual/family’s financial situation for sure. Many years ago, my wife and I had some credit card debt and a limited emergency fund. To accelerate the debt payments, we lowered the “cost” of the debt by applying for new credit cards with zero percent interest and paid us a sign-up bonus for getting the new card.
Also, we transferred the balance from higher interest credit cards to the new card. The transfer fee was 1-2% at that time. That allowed us to both pay off the debt and build our emergency fund faster; with zero percent interest promo, usually for a year.
During the past decade, we have made $10k or more focusing on taking advantage of the best credit cards deals and sign-up bonuses associated with online savings accounts. We get new credit cards every year as well as new online savings accounts for the sign-up bonuses. Our online savings account (emergency fund) pays about 2% right now. I posted about the tactic and how it worked for us on my blog. We recently got another new card last month ($250 sign-up bonus, zero percent interest on the balance for a year, 6% cash back at grocery stores, etc.). It is a great deal for us, might work for you as well.
I believe having a little extra in your emergency fund does allow you to make/save more money in the long run and it definitely reduces stress.
Thanks for the post. We blog about financial education at BossManJax.com – I recently started a FI blog myself, mainly to share my experience becoming financially independent with my nieces and young family friends.
Let me know if you ever want to write a guest post, or if you find any of our content helpful to your readers. I’ll be glad to share it with you to help others on their journey to FI.
I transferred debt to a 0% interest card…and it was so affordable I could easily take that little weekend away, go out to that pricey, new restaurant, buy the more expensive shoes, when if I was paying cash, I’d have bought the cheaper pair…for some of us, esp. if you’ve done without for awhile, having open credit is just too tempting, its like an alcoholic thinking they can have just a little drink…so Greg Magnus, no way…sure I ‘saved’ with credit card deals, but the free plane ticket I got was a pittance compared to the high interest on the rest of the vacation.
I also think we need to ‘take what we need, and leave the rest’, so for some of you having a larger emergency fund is the answer, or a HSA if you foresee health expenses. I love Dave Ramsey’s plan, but I’m not going to stop putting money away for retirement, because I’m over 50 and I only have $15k in retirement savings, and I don’t want to risk having to work until I die, or eat catfood in my ‘golden’ years…so anything to lessen that blow, by saving NOW and continuing to save as I pay down debt, makes me feel best. (but that might not be best for a 25 year old)…so buy the ‘dress’ and accessorize it to fit your sense of style.
Gary Haas says
I agree with Greg. My wife and I did the same thing of transferring high interest debt, to 1 year 0 interest cards. Just make sure you are not late on a single payment or it will come back and bite you. We were fortunate, no late payments, nor any emergencies, and were able to be completely debt free aside from a house payment, after a couple of years. Interest payments on credit card debt can be unreasonably high, in comparison to interest received on money saved. I invest in stock market interest funds at 2.36%, as compared to some credit card debt at 17% or higher. It was many years ago that we paid everything down, and the temptation to drive a newer car, buy unnecessary items, is hard to resist. Sometimes it seems like everything is against you, and you have to just keep on, but the rewards, of debt free living, will come with perseverance and self discipline
Saving and paying down debt together is what Crown Ministries teaches with their money map and Crown’s founder, Larry Burkett, is one of the people DR looked to for money advice in the early days before he came up with FPU. It’s a very good program as well, especially if FPU doesn’t work for you entirely. We needed to develop the habit of saving so we have always put a little aside, no matter what.
Totally agree with you on this. I’ve done the DR plan for a while now. I understand the concept of a $1000 EF. It helps people feel like they’ve accomplished something (and they have) to finally have $1000 in the bank. However, I have found that $1000 no longer covers most emergencies. Car repairs can EASILY cost more than $1000 now. Also, now that Cash for Clunkers has taken cheap, decent cars out of the mix, finding a car for $1000 now that does not cost additional money in immediate repairs is slim to none. In my neck of the woods, you’re not getting away with a $1000. It’s more like $3000.
Appreciate all your blogs. I’m a big fan. Especially with the Godly aspect of them.
Thanks for all you do!
Debbie McCulloch says