One of the things I love most about being a personal finance blogger is reading stories about other people who have reduced or eliminated their debt.

Our debt is pretty simple:

  • A mortgage – We re-financed our original 30 year mortgage (set to pay off in 2037) with a 15-year mortgage in late 2011.  This will put us on pace to pay that off in 2026.
  • A student loan – My wife has one outstanding student loan.  It is a private loan with a rate lock of just over 2% and a payment under $100 per month.  It’d be nice to pay this off early but we’re not changing our current strategy to do so.  Additional cash flow would have to open up.
  • Credit cards – None.  We use credit cards simply to earn cash back rewards
  • Car – None. We have two cars, both fully paid off.

It’s great as I see a lot of bloggers write about paying down debt, paying off debt, or discussing their personal debt payment strategies.  For the most part, they’re usually pretty good.

However, there is one thing that I usually see left off, and that’s to have a ‘No New Debt’ provision, and a plan to reach it.

If you start off with $100,000 in debt, work hard, and pay off half of it, that’s awesome!  What if you have $10,000 in debt, and you pay it all off.  That’s great, too!

And, with most debt payment stories, that’s often the ‘end’, so to speak.

What it doesn’t address is to make sure that number never goes higher.  In other words, if you pay off half of that $100,000 debt, you should make sure to do everything possible to avoid having that number go higher.

If you pay your debt off, congrats, but resist the urge to go splurge, financing a new car, vacation, boat, or whatever that’s going to get you right back in debt.

In other words, here’s my debt payment plan that you should adjust every month.

  1. Calculate your starting debt
  2. Make your payments
  3. Calculate your new debt total (it should be lower now)
  4. Set the new debt total as your debt ceiling

That’s right, every month you need to make sure that you set a goal to make your current total your maximum.

What that means, though, is that your debt payment strategy should plan for this.  I have read many articles on whether it’s advisable to save or to have an emergency fund if you are paying off debt.  The answer, based on my advice is: It depends.

How?

Well, if you are in a position where you are risk of emergencies, then yes, you should have an emergency fund.  Do you drive an old car that’s prone to breakdowns?  Do you live in an old house with a furnace or boiler 15 years past it’s expected date?  If these or something like these are in place, then you need an emergency fund.  If you live in an apartment and drive a bike to work, you might not need this as much.

Same goes with savings goals.  If you buy a house and you know you’ll need a new roof in 5-10 years, then start saving along with paying debt.  Otherwise, when that roof goes and you’ve paid every dollar toward debt, you’re going to have nothing left to pay for that new roof.  As good as it is to have paid off more debt, you’ll be violating your debt ceiling’ rule.

That’s not good.

So, make sure your strategy is complete, and if you focus 100% on paying debt, you have the best of intentions but you’re leaving a blind spot, and just like with driving, those can lead to peril in the blink of an eye.

Readers, what is your strategy to pay away and keep new debt at bay?