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My Percentage Based Debt Payoff and Savings Rule

My Percentage Based Debt Payoff and Savings Rule savings debt 2 Based on last week’s post asking if you can save and payoff debt at the same time, I decided to provide a little more insight into my debt payoff strategy.  As most know, I worked my way through $50,000 worth of credit card debt from irresponsible borrowing and spending.  There is no one to blame, but myself.  I have learned a valuable lesson from my journey into and out of debt, so I want to make sure I share all of the valuable pieces that I can.

I am a big believer that you can save money while paying off debt.  I believe this because I did it.  Not only did I do it, but it also changed my money mentality.  When I was in debt, I was making spending number one and saving number two.  After I paid off my debt, I switched and make saving number one and spending number two.  This the mentality that I want to have, so I am glad that I used my strategy.

There are some that think that it is unwise to save while paying off debt.  They tend to say that it is not good financially because you are getting charged interest.  They talk about the basic sense of mathematics.  While I love mathematics, debt isn’t truly about mathematics.  Yes, you get into debt because you spend more than you make, but most people are dealing with emotions.  Emotions push us to make bad money decisions and that is why debt is so rampant.  If paying off debt was just about mathematics, then no one would use the Debt Snowball.  Alright, enough about math, lets talk about the method I used when paying down my debt.

My Payoff and Saving Allocation

Any of you that invest know about investment allocations.  Your allocations can be deemed as aggressive, moderate, and conservative, plus a few more in between.  I used the same type of strategy with my debt payoff.  Instead of just allocating all of my extra money to my debt, I decided to allocate some to my savings account.

My first step was to find out how much I could allocate toward my debt payment.  This number is going to different for each person, but this is necessary.  Once you know how much you can afford to pay toward your debt each month, then you can come up with your debt/saving allocation.

I started out with a 95/5 allocation.  What this means is that I allocated 95% of my payoff money toward my debt.  The 5% was then put into my savings account.  For a simple example, if you have a payoff allocation of $100, then $95 will go toward your debt payment and then $5 will go toward your savings account.

This allocation was also placed onto any extra money that I got each month, whether it be from side income or work bonuses.  It is a simple strategy, but it is quite effective.

When to Change Your Allocation

Whether you create an aggressive or moderate allocation toward your debt payoff, you will have to change it after some time.  I changed mine after I hit some milestones that I set for myself in the beginning.  I went from a 95/5 allocation to a 80/20 allocation at some point.  This means that I was still pushing 80% of my payoff money toward my debt and 20% toward my savings account.

As time moved toward the date that I would payoff my last credit card, I changed my allocation to push more money into my savings account than towards my debt.  My last allocation came in at around 60% into my savings account and 40% toward debt.  You have to find a point when you will change your allocation.  You can create certain milestones or goals that you have to hit before you change the allocation or you can do it whenever you feel.  It is up to you.

What is the Point?

I am sure there are some of you asking what is the point of doing this?  Why should you save money when you are in debt?  Well, as someone who was in a lot of debt, I can tell you that saving money is all about creating a new mindset.

Even saving a small amount of money, you are doing something that you haven’t before.  You are actually saving money.  You are not spending that extra money and putting yourself into more debt.  We have lost our saving mentality that used to be the mainstream.  We need to get that back and the only way to do it is to save.

Another reason why this is a successful path is because you are building up a cash reserve.  Usually when people pay off debt, they are pushing everything they have at their debt.  They get to the last payment and then realize that they have no extra cash left.  They have nothing available for other purchases or emergencies.  With this strategy, you are building up your savings account while you pay off debt.  When you make your last payment, you are making a payment to yourself.  If you put money into savings during the whole debt payoff, then you will be ready to face the world debt free and with a good start for saving.

I am trying to change the mentality of money here, not just worry about math.  I understand math and I know how it works, but money is not just about math.  We use money based on emotion, so we have to change how we feel toward money.  I am happy that I used my method because I now feel bad when I don’t put money into my savings account or investment accounts.  I feel even worse when I spend.  This new mentality has me on my way toward financial freedom.

What do you think about my debt payoff and saving rule?  I would love to hear your thoughts.

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My Percentage Based Debt Payoff and Savings Rule savings debt 2

About Grayson Bell

I am an average Joe, who built up over $50,000 worth of credit card debt and had to learn how to break it back down. It took 4 years of learning budgets, secrets, and many other personal finance tricks in order to cut the debt to $0. Now, I push to teach others not only how to get out of debt, but how to use credit wisely and how to start growing their wealth. You can view my other site, Sprout Wealth for ways to grow your money. I am also a freelance personal finance writer who provides staff writing and ghost writing services.

59 comments

  1. I like the idea behind your rule as saving is very much a mental thing, although I don’t practice it. I realise that the biggest bang for my buck is paying off my mortgage and investing my money in various different places. If the interest rates rise a bit more then I will start saving money, but until then there are too many different investment options to choose from that will pay better.

    Note: I still have my emergency fund, but I don’t consider this savings. I am also able to freely take money out of the extra repayments in my mortgage offset account, this means I am easily able to get money in a hurry if i need to.
    Glen @ Monster Piggy Bank recently posted..Do you still buy DVD’s or CD’s?My Profile

    • Thank you Glen, I appreciate it. I did this rule to both fund my emergency fund as well as another savings account after I got to a certain point in my EF.

  2. Love it! I think it’s important to get in the habit (and mindset) of saving money. I love that you feel bad if you aren’t saving, and I am trying to decide the best long-term strategy for saving for me as well. I would like to put some money into an account for absolute emergencies (like job loss of some catastrophic thing happening to the house), and some in another account for “expected” expenses like cars and whatnot. Want to work out a solid strategy but still trying to decide what will work best.
    DC @ Young Adult Money recently posted..4 Things I would be more interested in if I was WealthyMy Profile

  3. That sounds like it worked great for you! Congrats. I’m glad that you were able to do both!
    Greg@ClubThrifty recently posted..How to Buy a Used Car Like a BossMy Profile

  4. If there is any good thing to having a debt in collections, it is that it is interest free. So, my personal plan is to fund my seasonal unemployment first and then throw extra money at that debt.
    Edward Antrobus recently posted..The Blue Collar Money ManifestoMy Profile

  5. I think this is an awesome approach! I haven’t seen anyone approach this question from an asset allocation standpoint, but I think it makes a lot of sense. I’ve said before that I agree with the saving while paying off debt approach, for all the behavioral reasons you mentioned above. Plus if you have an unexpected expense during your debt repayment, you have cash on hand to deal with it rather than resorting back to more debt. Like you say, a big part of successful money management is making good habits, which is why I wholeheartedly agree with your approach.
    Matt Becker recently posted..Bad for the Budget. Good for the Soul.My Profile

    • Thanks for the kind words Matt. I like to think of some things a little differently than others. The easiest way was to use investment allocation.

  6. I love it! The amount you save should be based on your long term plan. So, if you’re really behind on long term goals, too, you may place a little less toward debt and more toward savings. I know that sounds backward to some people but the power of compounding interest is a powerful ally.
    AverageJoe recently posted..Big Drugstore Discounts – Stacking Benjamins Episode #8My Profile

    • You are correct Joe. My long term plan was to save, but I also had that Debt that needed to be eliminated. This is why I went with this approach. Yes, I added a few more months onto my debt payoff, but it was well worth it.

  7. I really enjoyed this post! Too often you see people pay off debt but then have nothing saved. Whats worse is that they have not developed the habit of saving to when the debt is paid off they end up spending the extra money on things they didn’t or don’t need. I like the plan of going from 95/5 to 80/20 and being more aggressive with savings the closer you get to paying the debt off. It forces you to shift to a new direction.
    Your Daily Finance recently posted..The Basics on How to Build a Better BudgetMy Profile

  8. Great post Grayson! I also believe in saving some while aggressively paying down debt. Right now I’m averaging about $1300 a month towards debt and $100 a month towards retirement savings. I can’t wait until this debt is paid off so I can say I’m putting $1300 a month towards retirement! :)

  9. Jake @ Common Cents Wealth

    I’m all for any method that helps people pay off debt and save money. I think your method is great, but my wife and I did it a little bit different. We kept a fairly large emergency fund ($10k) which we built up first and then 100% of our extra money went towards debt after that. We felt pretty comfortable with our emergency fund, so we didn’t feel like we needed to add to it. I can see if someone had only $1k or less, that the percentage plan you mentioned above would work really well.
    Jake @ Common Cents Wealth recently posted..The Liebster Award!My Profile

    • That is quite the emergency fund. I didn’t have such a fund, but if I did, then I would definitely go with 100% on the debt. Everything depends on the situation.

  10. I think thats great! Saving is an important habit even if it isnt all you want to save, something will keep u in the habit!
    Jules@Faithful With a Few recently posted..How, Then, Shall I Spend This Short Life?My Profile

  11. I think it depends on where the savings is going. For example, I have my wife’s med school debt to pay off, but I want to take advantage of low mortgage rates and pickup another rental property, so we have put aside money for that. If I can’t identify any other investment opportunity that justifies not putting it all to debt repayment, then I will likely stick with straight debt repayment.
    Greg@Thriftgenuity recently posted..Implosion of the Movie Industry – Do They Promise?My Profile

    • You have a good point Greg, but when you are in a lot of debt and it is stressing you out, you need to find a way to relieve that stress along with fight the debt. A lot of people feel better with money in their savings account and having it liquid. I was very happy with this approach. While it might not have been about the math, it worked perfectly as I had planned it.

  12. I love it! It’s a mistake I see so often. I absolutely understand the desire to throw every penny you have at your debt, but if you have no cash reserve – you’re a crisis just waiting to happen. Things always break, stuff always happens and if you have no cash reserve – what can you do besides pull out your credit card? I think you had a very smart approach of aggressively eliminating debt and over time becoming more aggressive with your savings. Building a savings mindset is so important.
    Shannon @ The Heavy Purse recently posted..How to Teach Your Kids to Think about DebtMy Profile

    • I am glad you like it Shannon. I understand the desire as well, but I don’t think it is the right way. What is the point if you have an issue and you have to get yourself back into debt. This is the biggest argument for an EF.

  13. I’m fairly self-motivated, so I focus more on the math side myself. However, certain things really are more important than the math, and if you feel your motivation waning, then you really need to do everything you can to keep yourself going. It sounds like you have a great plan that obviously works if you’ve paid $50k off. Do an update in a few months and let us know where you’re at!
    Pension Retirement recently posted..The Do’s and Don’ts of Retirement PensionsMy Profile

    • For people in debt, it is not always about the math. They usually have to create a new mentality or mindset about their money and my method helps that. I am already done with my debt repayment, so I am good to go. That was all of the credit card debt that I owed.

  14. I learned that saving money is a lot easier for me if I don’t pay attention to it- IE- transferring money automatically. I make sure its an amount that I’m comfortable with.
    Marissa @ Thirtysixmonths recently posted..Going Back to School is not Always the AnswerMy Profile

    • All of my savings is automated now and it was when I was going through this process. If I had a manual deposit, I would just split it up for savings and debt repayment.

  15. I think many people don’t realize that saving is a vital component to paying off debt. If there is no savings built up to handle life’s emergencies, then most people will use credit to fix those problems. They have just prolonged their debt repayment schedule because they did not have the cash to handle emergencies.
    Brian @ Luke1428 recently posted..Investing Made Easy (Part II): When Should I Start?My Profile

    • You are spot on Brian. There are many out there that say that you should never save when you are in debt, but I disagree. I have been there and the stress of being on the edge with money was not worth it.

  16. I just had a fan Facebook me this exact question whether someone should save while paying down debt. I like the balanced approach because like you mention it builds a mindset.

    When someone who is in debt and has no savings can see that positive in an emergency savings it creates a relief of sorts in their life. I know we have a friend like this and every time her bank account has money in it she is much happier, when it’s gone she’s sad. Why would it be any different if she actually saved money and never used it unless there was an emergency. I would hope she would be happy there is money available to her that she saved.

    It may be small savings but anything is better than nothing at all. It’s also a head-start into the game of spending less than you earn and paying yourself first. When the debts are paid they are already in full-swing into saving.

    When one pays off a debt or many debts one can allocate more to savings as they go along. Once the debts are gone now the savings can grow even more using all that money which was used to pay down debt each month and/or dedicate it to something else that is important in the budget.

    I sent her the link to your previous post that you mentioned above and I’m sure she will see this new post. I hope your words will help guide her as well.
    Cheers mate.
    Canadianbudgetbinder recently posted..An introduction to investing – Part oneMy Profile

    • I really appreciate you sending her the link to the other post Mr. CBB. That is great. The whole part of this process is that you are changing your mentality from spending to saving. That is the goal. Even if you save only $5, you are still saving, which is probably something that many people haven’t done before.

  17. While it’s a great thing to be so motivated to pay off debt, I do think it’s important to save in the process. Like others have said, if something were to happen and you had no cash reserves, you would put yourself in further debt! That doesn’t serve for much motivation. Unfortunately I saw this happen to my parents, who were basically drowning in debt at some points. They barely had any savings because they were trying to keep up with bills, and if an emergency occurred, it set them back big time. It’s a horrible cycle. Saving is a great way to implement change and peace of mind.
    E.M. recently posted..Methods for DeclutteringMy Profile

    • You are right E.M. Emergencies happen and if you have no way to pay off that emergency, then you are right back where you started. It only takes one to throw a big wrench in your debt payoff plan.

  18. I think the ratio should ensure the borrower does not go further into debt. Once a sufficient savings is built up (doesn’t need to be much), then 95/5 says you’re serious about getting out of debt. Once you chip away at the high interest debt, it makes sense to back it down to 80/20 or even further.
    A Blinkin recently posted..How I Started Investing in the Stock MarketMy Profile

    • Well, I started with the standard $1000 in an EF. I didn’t want that to be all that was there because that is really low. I also knew that I had 4 years ahead of me with debt payments, so I wanted to start small with the savings and then end big. It really worked for me, but the ratio’s can be moved around depending on the situation.

  19. I didn’t really save when I was actively paying off debt. I had my emergency fund and I started saving seriously once my debt was paid off. Now I set aside money for expenses and what not and save everything else.
    KK @ Student Debt Survivor recently posted..New York State of Mind or Maine-iac?My Profile

    • No everyone has to save when they are paying down debt. This is just a plan that I used and will gladly show to others. If you felt comfortable with your EF, then great. Glad to see that you are funneling money into your savings.

  20. Though I agree with your system and think it’s really smart, for me, paying off debt is a better way to increase my networth than saving (while in debt). I would rather get out of debt faster than have savings in my acct while in debt (outside of ER funds etc) and then redirect debt money into savings when debt free.
    Catherine recently posted..Our Weekend of Unplanned Spending and Adjusting Our BudgetMy Profile

    • It doesn’t work for everyone. This was more of an emotional win for me. I didn’t go with the debt snowball approach, so I needed another way to keep myself motivated and seeing my savings grow while my debt shrink was very powerful.

  21. You sure can do that. Part of your take home pay goes in paying down debt and some to savings. There can be another step to take and that is to regularly invest using dollar cost averaging. For investing, another key point is diversify.
    Shafi recently posted..Five Ways To Stay Financially Afloat After An InjuryMy Profile

    • I was still investing into my 401k and that was good enough for me. Since I am relatively new to investing, I didn’t really look outside of my 401k until I was out of debt. I am kicking myself a little because of that, but I can’t look back now.

  22. Great post, Grayson. I think one of the most important things about saving while you’re in debt is simply that it creates the habit of saving, the mental mindset, like you talked about. I can see a real danger sign in not saving while paying off debt, that after the debt is gone, a person could go hog-wild and figure they now have lots of money to blow. If you’ve already established a savings habit, at least you won’t blow ALL of your extra money.
    Laurie @thefrugalfarmer recently posted..Recipe of the Week: Beans and RiceMy Profile

    • This is the exact reason why I did this. I was spending most of my money before, but now I sit back and save it. My purchase decisions are longer and more thought out and I feel great when I transfer money into my savings account.

  23. Even when I have a car loan (which will be gone soon) and other debt, I still save. It’s important to me. I don’t want to start a debt free life with nothing.
    SuburbanFinance recently posted..What To Do With Your RefundMy Profile

    • Good luck to you. I didn’t want to start the debt free life with nothing to show, so that is another reason why I saved. It was very empowering to see that money in my savings account.

  24. I have the same ratio perspective on paying off debt vs. saving. I thought I would make it more 50/50 by now, but I’m so over the debt that I’ve decided to just carry it at 70-80% for the rest of the process. I agree about learning to save, even if it’s a slight percentage, because it helps set up better habits in the long term. Great post – I agree it’s not as black and white as math.
    anna recently posted..June Update – Halfway There (Who-oa, Livin’ on a Prayer)My Profile

    • Thanks for your feedback Anna. There are so many different percentages that people can take, but it is all personal. I started extremely aggressive, then dialed it back.

  25. Hi Grayson,

    Yes, it is possible to settle your debts and save even just a small amount at the same time. The ratio depends on us. It is possible to schedule payments so you can have a little money left for savings every payday.
    David @ PBC recently posted..Teaching Kids About Money Does Not Have to be a ChoreMy Profile

    • Most of my debt payments were scheduled and my savings was automated based on my numbers for the month. There were times when I had to make changes, but that is understandable.

  26. I think its wise to save and pay down debt at the same time. Basically you aren’t putting all your eggs in one basket which is always a good way to minimize risk, even if it might not make the most sense mathematically to prolong the debt pay off. I’m actually trying to build up my emergency fund right now, so I’m not currently paying any extra towards my debt. So i’m probably at like a 40/60 or 50/50 debt to savings ratio. (I’d have to calculate that out though)
    thepotatohead recently posted..How to Buy on Ebay: A Beginners GuideMy Profile

  27. Grayson, this is a great post. I have often talked to people who concentrate on paying down their debt to the exclusion of their savings only to see the error of their ways after a job loss or cutbacks at work.
    Jerry recently posted..Tips To Take The Intimidation Out Of BudgetingMy Profile

  28. It’s so true, money management I’d say is mostly psychological, and much less math than people make it out to be. I know just putting an extra $50 towards my miscellaneous/emergency savings each month has made me feel far more in control of my money. If I hadn’t put that into a savings account, it likely wouldn’t have gone to my debt anyway — I would have found a way to foolishly spend it somehow. I now contribute more than that to my savings, while still working on mostly debt, but the biggest advantage has been actually having money there when I need it — when needing to get a deposit on an apartment, pay an insurance deductible, go to the doctor etc. No more putting everything on my CC because ‘I don’t have the cash right now’!
    Kayla recently posted..I’m so sorry to hear about what happened to your car! However, the way you handled the situation was very admirable. Now lets hope some justice is served on the driver who caused the chaos to happen!My Profile

  29. Here in Australia we can get a ‘offset account’ for our mortgage – essentially it is a savings account however instead of earning interest it reduces the interest on the associated mortgage. The money in savings stays fully liquid, but the loan balance for interest purposes reduces with savings. This has allowed me to throw all of my extra money at debt without worrying about liquidity or being able to access savings. If I didn’t have access to an offset account, I would definitely be doing the same as you and saving 5-10% of my money in a liquid account for emergencies.
    Financial Independence recently posted..What can Pokemon teach us about consumption?My Profile

  30. This is excellent. Maybe you’ve already addressed this, but I would like to to discussions regarding hanging onto money that has been saved. I’ve known people who will manage to save a few bucks, then have to use it shortly. Or at least they think they need to use it. For some folks, as soon as they get a little cushion, they find an excuse to spend it. I’ve found over the years that even for absolutely necessary expenses, such as car repairs, etc, many times it possible to absorb at least part of the expense from regular cash flow without using saved assets.

    • Thanks for the comment Angela. I will work on creating some topics around this and hopefully you will be able to get some feedback on holding onto your money or what others do in order to hold onto their money.

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