Analyzing the 75/25 Method As A Debt Reduction Plan

Tonight, I participated in a personal finance chat on Twitter with the hashtag #bp, which stands for Budget Pulse, which is the company that hosts the chat at 7pm on Wednesday nights. This was only its second week, and there were dozens of participants, so you should definitely join next week!

To follow the conversation, follow the hashtag #bp on a website such as Twitter Search, Tweet Chat, or Twubs.

While I was following the conversation, I noticed Matt Jabs from Debt Free Adventure talking about the 75/25 method. This method is a hybrid of several different debt reduction plans. Dave Ramsey teaches to build up a $1,000 emergency fund, pay off debts smallest to largest, then build a large emergency fund, but some people like me and Matt Jabs, having only $1,000 in savings is scary. He came up with a method where he puts 75% of his extra money towards paying off debt and the other 25% goes towards his savings goals. Right now, he’s putting 75% of that towards his large emergency fund, 15% towards a new car, and 15% towards vacations. Matt has taken advice from many different sources and come up with a system that works for him. Here is a snippet from his article:

  1. Always pay yourself – I do not like to see ALL my money go out each month without paying myself at lease some of it.
  2. $1,000 is not enough for us – we built our initial $1,000 EF and a few weeks later the transmission on our only vehicle died costing us $1,600. Shortly after that we ran into another even larger unexpected expense.
  3. Balance is always good – when I see 100% of my money going out, but none staying home with me, I do not feel properly balanced.

$1,000 wasn’t enough for us either. When the economy went south and my job opportunities were slim, I started stashing away a larger emergency fund while still aggressively paying off our car loan, which is one of three loans we need to pay off. After reading this article, I found out that I was doing something similar to this without thinking of it was a specific method. So, what works for you? Sometimes, you need to take advice for many different personal finance sources and make the advice work for you. I like the 75/25 method, because it allows for aggressive debt reduction while accomplishing short-term savings goals at the same time.

  • Matt Jabs

    “You can’t go wrong getting out of debt.” – Dave Ramsey

    And boy ain’t that the truth! :-)

    That said, we have to do what works for us. Especially with the massive downturn in our economy, which you mention, it is very important to diversify our focus. Saving is always a good idea. Sure, you may be out of debt a little faster if you commit 100% to repayment… but what if something happens along the way? Will you have to use a credit card again? If you continue to save at least a portion of what you take it, you can feel more secure about the unknown – and that is worth a lot to me!

  • Craig

    Balance is always good, all depends on your system. I balance out but don’t usually have a specific percentage, just try to spread the wealth between saving for investments and vacation.

  • Peter

    To a degree I agree that in some cases $1000 for an emergency fund just isn’t enough. My wife and I had a medical emergency when we were getting out of debt -and on the dave ramsey plan. We had ignored his $1000 advice, and had a $2000 emergency fund. Our hospital bills came out to about $1800 – so having a larger one worked for us.

    On the other hand you have to be careful of saving too much when you’re in debt because it can short circuit your debt reduction. So while i’m all for a slightly larger emergency fund, I’m not for continuing savings indefinitely while in debt. Just my 2 cents. :)

  • Gina

    Although I am a big Dave Ramsey fan, I too feel that $1000 for an emergency fund is much to small. I think that the amount for an emergency fund is variable from person to person given their stage in life. For me, peace of mind knowing that I truly have enough in my emergency fund is worthy of a few months more in debt.

  • Elizabeth I

    Has anyone had a true emergency that cost less than $1000? I cannot recall a time when a big car repair bill, dental bill, or large medical bill was LESS than $1,000K.

    People need to realize that your “emergency fund” is really a financial stabilizer. It allows you to get to a place where you can START to pay down your debt and not be reduced to square one (going back into debt) on account of an unexpected financial emergency.

    Thus, once people have $5000 in a savings account, then any money going toward debt is going to be consistent and have a major impact.

  • Shock

    What I like to do is once a debt is paid off, I then either take the amount I was paying on the that debt and move it to paying off another debt or increasing my savings by that debt payment amount. Percentages are too rigid for me. I pay off the smallest debt and then take that amount and apply my method.

  • Guest

    Like NeverNudes … there’s dozens of you! LOL.