As you continue on your road to financial freedom, it is time to take a look at Destination Two. By completing Destination One, you should have $1,000 in an emergency fund. You should know where all your pennies are spent through the use of a spending plan. And you should be on your journey to generosity by giving back to God.
With the basics under your belt, you will begin Destination Two by increasing your emergency fund to one month’s income and paying off the credit card debts.
It is important to evaluate your priorities between saving and paying down debt. While there seems to be much debate about interest rates and saving vs. spending (in terms of the interest rate charged on credit card debt), the Money Map thought process helps protect the good steward against future dependence on credit cards or other forms of debt through the use of an emergency fund, while also beginning to chip away at debt.
By using a spending plan, you have defined areas of surplus spending. If you have credit card debt, add half the monthly surplus to prepay your credit card debt and half the monthly surplus to increase your emergency savings.
This balanced approach is why we emphasize setting money aside in small, doable increments rather than throwing every last red cent at debt that has been accumulating for years, leaving us without any savings whatsoever. Biblically speaking, we are to owe no man anything and it is important to pay those debts quickly, but we also need to be prudent about what brought us into the shackles of debt to begin with and take proper measures to insure ourselves against it by having money set aside to handle emergencies.
The goal of one month’s income will be different for every family and saving one month’s income may take more time than setting aside the initial $1,000, but it is important to remain patient and gradually increase the emergency fund balance in order to hedge against future debt.
When tackling the credit card debt, half of the monthly surplus plus the minimum payment is applied to “Card One” – the credit card with the smallest balance. The minimum payment is made on the remaining credit cards
Again, there is often debate about interest rates vs. outstanding balances, but we teach the Biblical steward to start with the card that has the smallest outstanding balance rather than the card with the highest interest rate in order to have a quick victory.
Once “Card One”–the credit card with the smallest balance–is paid off, the whole amount (minimum payment plus surplus) that you were paying on “Card One” is added to the minimum payment on the card with the next highest balance. Doing this with each subsequent credit card debt, the pay off schedule gains momentum and the debt is reduced much more quickly. After your emergency fund is at one-month salary, the extra income you have been diverting to your emergency fund can also be applied to the credit card debt, further speeding up the payoff.
While you are paying off credit card debt, you’ll never get ahead of the curve if you keep using them to rack up more debt. If you are addicted to credit cards, use one of our tried and proven strategies to stop using them:
- Plastic surgery–introduce your credit cards to a nice sharp pair of scissors!
- Heat ‘em up–place your cards on a cookie sheet covered in aluminum foil and put the whole thing into the oven set at 3500
- Freeze your credit–put your credit cards into a plastic bag; seal the bag; put the sealed bag into a bowl; fill the bowl with water; put the whole thing in the freezer
It is important to stop using credit cards and focus on the payoff plan during the credit card pay-off period in order to get all the credit card debt wiped out. Oftentimes we can see a large chunk of money that has been freed up during this pay-off period and are tempted to redirect that money to another destination on the Money Map, such as saving for our children’s education or paying down our mortgages. However, patience with this process will prove to be your best advocate for getting to the end of the Compass Map and arriving at the final destination of Financial Freedom.
“My friends, consider yourselves fortunate when all kinds of trials come your way, for you know that when your faith succeeds in facing such trials, the result is the ability to endure.” ~ James 1:2 & 3