Over the last several months my family’s top two financial priorities have been to become credit card debt free, and establish an emergency fund of six months of expenses. I’m proud to report that we have made a lot of progress, and should accomplish both goals by year end.
We rarely do things as prescribed, and our debt snowball plan was no exception. Thanks to a combination of events – from the broader economic slowdown, to a life-threatening illness in my family – I have becomes less and less aggressive at paying off debt, and opted to rearrange our priorities a bit to accumulate savings faster. But I did not want to completely abandon our goal of paying off credit card debt.
The Recession-Proof Debt Snowball
One of my biggest complaints about debt snowball plans is that they usually begin before an adequate cushion is saved. After all, a $1,000 emergency fund does not last very long in a period of unemployment, or a long illness, or a string of visits from Murphy. I consider $1,000 to be an absolute bare minimum amount for an emergency fund. It’s a good start, but not a balance to rely on for months while working to pay off debt. I’ve read from other bloggers who have modified their own debt snowball plan to address this lack of security, and I came up with a plan that would work for us. Here’s what we decided to do.
1. Pay minimum payments on all credit card accounts. Making at least the minimum payment lessens the chances of credit card issuers jacking up interest rates for no reason, or lowering your credit limit.
2. Save $1,000 in an emergency fund. Continue to pay minimum payments on all debts, and use any additional money to save up $1,000 in a separate savings or checking account. This did not take us very long, and after a few paychecks, a yard sale and putting up a few items on eBay, we had $1,000 in savings.
3. Save amount of lowest debt plus $1,000, and then pay off the debt. In our case, we had an old $2,600 consolidation loan at our credit union. Rather than making extra payments on the loan, we just continued to put any extra money in savings until we had accumulated $3,600 (it was actually a little lower because we had made a couple payments). When we hit the pay off amount, we wrote a check for $2,450, taking the loan to zero, and our emergency fund back to $1,000. Then we targeted the next highest debt balance.
It was not long before we were targeting a $4,000 credit card balance that I accumulated while finishing up school. Over the next few months we watched our savings balance grow, and it was comforting to know we had a few thousand in savings. In an emergency, we knew we could have simply used some of the savings and avoided going back into credit card debt. Under a traditional debt snowball plan we would have kept the $1,000 in place and used the extra money to make large debt payments, leaving with very little savings to cover an emergency.
This recession-proof debt snowball does not get you out of debt any faster. In fact, you will pay a little more in interest for not paying down your debt balances sooner. But it will allow you to keep more in savings for longer periods of time. For us, this peace of mind was worth the additional interest.
In September, our plan was put to the test when my mom suffered a stroke at 53 and lost her income while hospitalized over 100 days. We were able to “circle the wagons,” and help her thanks to our savings. Now that things have stabilized, we can again turn our attention to using the savings towards paying down our debt.