A few days ago I stumbled on an article that talked about an interesting way of paying off debt. It’s actually something that I’ve been doing but never thought about writing an article about it. The basic principal is to keep putting money in savings until you have enough saved to pay off an entire debt.
Why is this method of paying of debt effective? Almost every financial plan you will find involves saving an emergency fund before you start paying off debt. By saving money in a savings account until you have enough to pay off an entire debt you are also keeping an emergency fund in case something major comes up during this time. I would suggest saving enough money to pay off the debt as well as some extra before paying off the debt.
For example, we owed about $10,000 on our car. We kept putting money in our savings account until we had about $13,000. We paid off the entire balance on the car loan and still had over $3,000 in savings. If at any time during this period an emergency came up we could have paid for it with cash and then continued to save.
I’m not saying this is the best way of paying debt from a maximum amount of money saved, but I think it’s effective. Paying down large interest rate debt month by month may allow for increased money saved, but might not be as effective for some. It’s just another method toÂ consider for yourself.