How to keep money in your pocket while you’re paying off debt


Are you ready to start killing your debt?

Whether you make the minimum payment or you’re ready to accelerate your debt repayment like a mad man/mad woman, you need a strategy to make that happen.

Why you need a debt-repayment strategy

While you have to make the minimum payment on your debt each month, what happens if you want to accelerate your payments? If your budget can accommodate it, that’s great. You can pay your debt down faster. But what if, at the same time, you have a competing goal like you want to increase your emergency savings fund or you’re uncomfortable tying up some of your spare cash because you expect a change of circumstances?

Read more: Clark’s guide to paying off credit card debt

You can put a strategy together to pay off your debt and save at the same time. Interested? Read on…


Think outside the box

Instead of a regular mortgage, my husband and I bought our first house on-contract. And instead of a monthly payment, we paid a lump sum to our house’s owner at the beginning of each year (at the owner’s request). Because we weren’t confident in our ability to leave our savings account untouched — or even to save the proper amount on a monthly basis — we saved up the entire year’s payment as quickly as we could. Then, we put the money into a short-term CD (certificate of deposit) that was due to mature the week before our yearly payment was due.

We liked this strategy because the money was harder to access — but, if necessary, we could get to it in an emergency. We also earned a little more in interest by doing it this way.

Debt-repayment: Slow and steady

Today, we have a regular ol’ mortgage with a regular ol’ monthly payment. Most months, we pay about $83 extra, but we want to pay off the mortgage ASAP. We could easily afford to make an extra payment every two months. With some sacrifice, we could double our payment each month.

If that’s our goal, why aren’t we doing it consistently?


Good question.

We have an emergency fund in place, but sometimes I think about all the emergencies that can happen with three kids … with an old house … not to mention old vehicles.

We don’t want to tie up a big chunk of change in our house by accelerating payments if we would get hit by three or four emergencies all at once.

Read more: How to rebuild your emergency fund

A debt-repayment strategy that maintains liquidity

If you have similar concerns, what about this idea:


Instead of paying two mortgage payments every month, or paying extra on your student loans, why not pay your regular payment to your mortgage holder or student loan servicer first? Then, “pay” your debt repayment savings account with the extra payment. At the end of a year, you could take half of the savings in the debt repayment savings account (or whatever amount you felt comfortable with) and make a dent in your debt.

Another strategy is every so often (quarterly, perhaps?), roll some of the money into a CD. You can create a CD ladder and when each CD comes due, you can apply the CD to the debt (check current CD rates here).

Read more: Should you close that paid-off credit card?

Either way you do this, I see three advantages:

  • You’re earning a little bit of interest (precious little, unfortunately, but it’s still something) on your money.
  • You’re keeping your cash fairly liquid in case of an emergency or an opportunity that may come your way such as rock-bottom stock prices, a low-cost real estate investment, or even buying meat in bulk.
  • You’re living on less. When you get used to living on less, you may be able to save more once you are completely out of debt!

This strategy bridges the gap until you can devote all extra money to savings — after your debts have been paid.

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