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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.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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