Debt Snowball Plan For Recession

Over the last several months my family’s top two financial priorities have been to become credit card debt free, and establish an emergency fund of six months of expenses.  I’m proud to report that we have made a lot of progress, and should accomplish both goals by year end.

We rarely do things as prescribed, and our debt snowball plan was no exception.  Thanks to a combination of events – from the broader economic slowdown, to a life-threatening illness in my family – I have becomes less and less aggressive at paying off debt, and opted to rearrange our priorities a bit to accumulate savings faster.  But I did not want to completely abandon our goal of paying off credit card debt.

The Recession-Proof Debt Snowball

One of my biggest complaints about debt snowball plans is that they usually begin before an adequate cushion is saved.  After all, a $1,000 emergency fund does not last very long in a period of unemployment, or a long illness, or a string of visits from Murphy.  I consider $1,000 to be an absolute bare minimum amount for an emergency fund.  It’s a good start, but not a balance to rely on for months while working to pay off debt.  I’ve read from other bloggers who have modified their own debt snowball plan to address this lack of security, and I came up with a plan that would work for us.  Here’s what we decided to do.

1. Pay minimum payments on all credit card accounts. Making at least the minimum payment lessens the chances of credit card issuers jacking up interest rates for no reason, or lowering your credit limit.

2. Save $1,000 in an emergency fund. Continue to pay minimum payments on all debts, and use any additional money to save up $1,000 in a separate savings or checking account.  This did not take us very long, and after a few paychecks, a yard sale and putting up a few items on eBay, we had $1,000 in savings.

3. Save amount of lowest debt plus $1,000, and then pay off the debt.  In our case, we had an old $2,600 consolidation loan at our credit union.  Rather than making extra payments on the loan, we just continued to put any extra money in savings until we had accumulated $3,600 (it was actually a little lower because we had made a couple payments).  When we hit the pay off amount, we wrote a check for $2,450, taking the loan to zero, and our emergency fund back to $1,000.  Then we targeted the next highest debt balance.

It was not long before we were targeting a $4,000 credit card balance that I accumulated while finishing up school.  Over the next few months we watched our savings balance grow, and it was comforting to know we had a few thousand in savings. In an emergency, we knew we could have simply used some of the savings and avoided going back into credit card debt.  Under a traditional debt snowball plan we would have kept the $1,000 in place and used the extra money to make large debt payments, leaving with very little savings to cover an emergency.

This recession-proof debt snowball does not get you out of debt any faster.  In fact, you will pay a little more in interest for not paying down your debt balances sooner.  But it will allow you to keep more in savings for longer periods of time.  For us, this peace of mind was worth the additional interest.

In September, our plan was put to the test when my mom suffered a stroke at 53 and lost her income while hospitalized over 100 days. We were able to “circle the wagons,” and help her thanks to our savings.  Now that things have stabilized, we can again turn our attention to using the savings towards paying down our debt.


  1. We bumped our emergency savings up to $2,500, and I’m glad that we did. I feel so much more secure knowing we’ve got at least that much in the bank. We also have a house repair fund which is currently hovering around $2,100, so we’re in good shape. I don’t think I’ve ever had so much money in savings! Kinda sad, considering that I’m 28…

  2. I am doing this to pay off the van that we had to buy sooner than we’d planned. However, my issue isn’t the discipline to NOT tap the cash, but the courage to use it to pay off the debt. Having that cash available gives me a sense of peace, so it is very hard to take it out of savings – even to pay off a debt I hate! We currently have the van loan balance plus $1,000 in savings, but I’ve decided to save the amount of the loan plus $5,000.

  3. Jason,

    Fantastic twist to a great plan. I’m not going through any debt issues right now, but if I were to find myself in your boat, I think I would come of with something similar.

    Thanks for sharing your snowball idea.

  4. My wife and I are finally getting closer to paying off my student loans. Then we’ll be able to pay hers off quicker which is a good feeling.

    Right now, we have a quasi emergency fund. We have savings that we deemed untouchable, but it’s also the start of our down payment.

    It’s working out so far!

    Stupidly Yours,


  5. Interesting method. Right now we’re doing something similar with Micah’s loans because they’re in deferment. All our snowball/flake money is going into a special account which can also be used to pay any additional university costs so we don’t need any new loans.

    Even with loans accruing interest, I can see the value of peace of mind and of actually paying them off. If people are too scared of financial hardship to pay off their debts, then the method is useless for them anyway. Paying it off early still saves a lot in interest. 🙂

  6. You’ve come up with a great plan. The proof of that is that you were able to weather a financial emergency without your budget falling apart.

    Sometimes the fastest route, such as paying off debts first before starting an emergency fund, isn’t the best route. Sure you’re paying more interest, but you’re more stable.

    Kudos for all the hard work!

  7. I understand the approach… I guess I just worry about all that extra interest while you are saving. We are almost at our $1000 (we will be there next month) We will continue to save… but most of any extra money will pay off debt.

    I’m really afraid that one of our creditors is going to come at us and lower our limit on a card where we are already at 75%

  8. Somehow I was doing this already by just realizing that I should maintain a good liquidity rather than throwing every penny at the credit card companies. It works out well for those unexpected emergencies.

    I would also say that the minimum emergency fund should be more like $3000. That should take care of any appliance or vehicle problem short of an absolute multiple meltdown.

  9. I totally agree with your concept. I have always had an automatic transfer into my savings with the intent of building up that cushion when possible. We paid off our credit cards years ago and now only use them when we can pay the balance in full monthly. Lately though, my cushion has been flattened a bit by unexpected emergencies and special events (like a daughter’s wedding). Seeing that savings balance deplete makes me very uncomfortable, especially since I recently retired and will no longer see periodic raises to keep up with inflation.

    Appreciate your site and insight.

  10. I like your approach. I have privately been wrestling with the debt payoff/larger emergency fund dilemma for awhile.

    One of the key considerations for us is how recession-resistant our employment is. I’m a key revenue producer (aka salesman) at our company, so mine would most likely be one of the last positions cut if our company found itself in dire financial straits.

    That said, we’re operating on the $1,000 emergency fund for now. When we get our debt paid off…probably by late summer, we’ll start saving $12k cash for a replacement car. This fund will double as our increased emergency fund.

    Great post!

  11. This is a great article. Thanks!

    DH and I were discussing what to do recently because it seems that we either pay off the card balances and neglect to save…which means that when the next emergency happens we put the bill on the credit card…and it seems to be a never ending cycle.

    Hoping to use the advice you gave to get out of the cycle!

  12. With todays condition credit card companies may look at just paying the minimum payment as a shaky customer. Just paying a dollar more shows that you paid more than the minimum, and could reflect on your credit score.
    Just my two cents from past experiance.

  13. Hi,

    In my country, Australia, there isn’t a credit reporting scheme like your FICO. Paying minimum payments, particularly on credit cards, doesn’t help one’s credit history in my country. If I was debt snowballing I would pay the minimum plus 10 to 20% of the minimum as well as building up the emergency fund.

    I’m in the situation where I don’t need to debt snowball – I have two credit cards – on one of them I am paying well above the minimum because it’s current interest rate is 0% and if the debt is paid back before the interest rate reverts to 23.99%, I won’t have to contend with back dated interest. Once this one is paid off by the end of this year I will boost my emergency fund account and increase payments on the other credit card.

    I’m looking foward to the day when my only debt will be my mortgage – which as aside I make small but regular monthly additional repayments on – there are no tax breaks on mortgages in Australia if the mortgage is for one’s home.

    I’d like to finish by saying that the approach presented in this post has quite a bit of merit.

  14. I like the idea.

    If you value the security of the savings more than saving the money on interest rates, then this is undoubtedly the way to go!

    I think doing things this way depend on how much debt you have.


  15. I payoff & save that way also. It doesn’t feel so much like a chore when doing it this way (to me). I love to see the money accumulate, even if i am using it to pay off. It is simple reinforcement that I CAN save & do. Nice article, thanks. 🙂

  16. We have always tried to keep a buffer of $10,000. Last September we were sitting pretty at $20,000 and within the space of 6 weeks – major car repairs, unexpected bills and a medical emergency in Malaysia saw our savings dive to $1000.

    Since then we have saved frantically, wondered if we should pay less on the mortgage to make saving easier but have kept up our current payments. There have been 2 more trips to Malaysia and an expensive start to the school year in Australia.

    I have been snowballing one of my credit cards and paying a little more on the other. Our savings are currently at $5,000 and debt is decreasing fortnightly. Our interest rate on the mortgage has dropped 5% in the last six months and this has lead to even more being paid off fortnightly.
    At this rate we will own our house outright by October, but if our savings get to $10,000 we will start dropping more onto the loan.

    Have been taking hints from a a book called Debt free, cashed up and laughing – the cheapskates way to living the good life/ Cath Armstrong

    Soon to be laughing!!!!

  17. I spend like I’m still in college, which works out great. I think these days that people need more than $1k in an emergency fund, especially if they are over-leveraged on their assets and may need the cash to cover payments month to month.

  18. I’m so glad to see this put forth as a valid snowball technique! My only debt is student loans and those are fixed at very low interest rates. Since my EF is only at 3 months (which I feel is not adequate for a single gal with a single income) I throw everything extra into that account with the knowledge that I could make large loan payments if I wanted to. Although currently I’m hoping to have an extra 3-5k by next January-ish to start an IRA.

  19. I like the idea of keeping your money liquid in case of unemployment during the recession, especially if you’re in a field that is susceptible to layoffs. However, this idea doesn’t let you see your debts decrease every month – which is the main motivator of the debt snowball. That’s only my opinion though, otherwise, a sensible idea during financial crisis.

  20. My husband and I didn’t think that $1000 as an efund was adequate, so we did the same thing as you in order to pay off our last credit card. It worked really well for us since we knew we had the money in savings if either one of us lost our job. Our card has a 0% interest rate, so it was really a win-win situation. It’s a personal choice on how to best save money and it really comes down to what makes you feel most secure.

  21. I used a similar approach when I was paying off my car loan, but instead broke it into chunks of $500 to $1,000. I appreciated the security of the extra cash in my account, and sent it to the bank to apply toward principal when I knew I had breathing room.

    Chunking it up a bit might ease the mental stress – rather than going from $5k to $1k in the emergency fund when you’re ready to pay off this loan, instead plunk an extra $500 into the loan and leave your emergency fund with 3xrent at all times.

  22. A great idea in the current economic climate. It’s too late for me to do this from the beginning, but I am now doing it for my last debt: My bank loan.

    Because it is front-loaded, I can’t overpay it so I’m saving the lump sum to do so in my savings account. When I get to loan balance £1,000, I’m paying the sucker off!