So we are all in different spots when starting your debt pay off journey. Some have absolutely no liquid money available to throw at their debt and others have thousands of dollars to start out with yet still keep debt around. I’ll break down how I would approach the various scenarios towards using that money in your debt pay off.
Scenario 1: You have $1,000 or less
So while I advocate starting your debt payoff now, like right this very second, like seriously, right now, if you don’t have $1,000 in your account for emergencies then save $1,000 up first and then start to attack your debt. If you have never saved $1,000 before then by doing this you will prove to yourself that you too can do this (you honestly can so don’t doubt yourself) and pay off your debt too.
Scenario 2: You have $1,000 or more but have way more debt than you have money
This is the category that Erin and I fell in. Starting out we had about $10,000 in cash but we had $107K in debt. Sure, we could have thrown a few thousand at our debt to begin with but we decided that since it wouldn’t make much of a difference to the overall balance we wanted to frontload our work/effort and use the cash later in the process as we were getting closer. This way, we could prove to ourselves that we were willing to do what it took and that it was possible to tackle such a large number which was really the critical piece here. If we had applied the $10,000 starting out we still wouldn’t have known if we could make the changes we needed to make to pay this down.
Scenario 3: You have $1,000 or more and the same amount of debt as money
So if you are carrying debt around yet have the same amount of or more cash in the bank there are a couple different options.
Option A – Take your money, leaving $1,000 in the bank, and pay off your debt. This will eliminate the related minimum payments enhancing your cash flow and you will be debt free. Yay!!!! You can then start to build up a 3-6 month emergency fund and be on your way. My main concern with this approach is that you might not have learned your lesson with debt and might go straight back into debt. It is critical that you learn how to spend less than you earn and either pay off debt or save the remainder if you want financial success. If you follow this option please figure this part out or else you will end up right where you started.
Option B – Keep the money in the bank and start saving up each month to start paying off the debt. The downside here is that you will pay more in interest with this option than with option A. The upside is that you prove to yourself at this moment that you can spend less than you earn and start paying off debt. Learning how to do this will benefit you so much more than whatever amount of money you spend in interest since if you can do that every month for the strong majority of your life you will easily win with money long term.
We are all in different spots but the critical part, once again, is to live on less than you make and pay off debt / save the rest. For us, paying off our debt was transformative due to the behavior change and mindset we implimented. We want the same for you so that when you are debt free it is only the beginning of your success.