While it’s important to continue making at least minimum payments toward your debt obligations while building your emergency fund, the real heavy lifting starts when your nest egg comes of age. The most efficient debt strategy has three parts: 1) budget; 2) 'island approach'; 3) 'snowball' payments.
Budget with a purpose: Start by listing your recurring monthly expenses in order of importance and cutting those you care least about until what you spend is less than what you bring in each month. Make sure to factor emergency-fund contributions into this budget, and write it down so you can reference it as you go. Set a goal, too. If you’re cutting back just to cut back with no ultimate purpose (e.g. becoming debt-free in 18 months or staying out of debt while saving enough to send your child to college), it will be much more difficult to remain focused. You can use Card Hub’s credit card calculator to determine how much you need to save/spend each month in order to meet your goal within a specific period of time as well as which card will get you there the fastest.
Island approach: Designate a credit card for each of the major types of transactions you have to make, as if they’re individual desert islands. For example, use a card offering zero percent interest to carry debt and a card with great rewards for everyday expenses. Not only will this type of compartmentalization get you the best possible credit card terms, but it will also minimize interest since you’ll have a grace period for paying off new transactions. You’ll also give yourself a built-in debt warning system, because you should always pay for everyday expenses in full within the billing period. So, if finance charges on your everyday spending card show up, that will be your signal that you need to cut back.
- Debt snowball: Use most of the money previously committed to emergency-fund contributions to start paying down your most expensive debt. Continue making minimum payments on any other balances until the most expensive one is gone and then repeat. With each balance that’s eliminated, you’ll progressively be able to attribute more toward your principal, as if you have a payment snowball that’s gaining momentum as it rolls down a mountain toward a doomed debt castle.