The 1/3rd Rule – If you have ever wondered how to break the cycle of needing to continually borrow then read on.

Put in to your savings account an amount equal to what you were making as an extra payment. At the end of the month divide what you have put aside by three. Then take this amount and make an extra payment on the debt you are trying to repay faster. Repeat the process, each month making bigger repayments.

Example

Month 1

Total saved is $600. Dividing this by three equals $200. Make a lump sum payment of $200 onto your debt and leave the $400 remaining in your savings.

Month 2

Total added to savings is $600 and you still have the $400 saved from the previous month giving you a total savings of $1000. Dividing this by three equals $333. Make a lump sum payment of $333 onto your debt and leave the $667 remaining in your savings.

Month 3

Total added to savings is $600 and you still have the $667 saved from the previous month giving you a total savings of $1267. Dividing this by three equals $422. Make a lump sum payment of $422 onto your debt and leave the $845 remaining in your savings.

To view a diagram of the above click here.

Summary

By repeating this process you can see that you are making increased payments each month to reduce your debt faster and you are also building up savings as a safeguard. The biggest risk to putting everything on to your extra debt payment is that if something unexpected arises you have no way of taking care of it. The only option is to borrow money and then you start to feel like your not winning and give up on having a plan.

While reducing debt faster is a good goal to have always ensure you are building adequate savings in the background.

For other helpful ideas on how to improve in all things money check out our articles.