Pay Down Debt with Passive Savings

Passive income is a term with which many people are familiar. Loosely defined, it's income that is generated without little or no effort after the original effort. Writers and actors receive passive income with residuals. Insurance agents receive passive income with renewal commissions.

Passive savings, however, is not a term that is commonly used.

Passive savings are savings that are generated month after month or year after year with little additional effort beyond that which was required to set them in motion.

For example: A family looking to cut expenses might decide to cut coupons in order to save on their food bill. The family must continue to cut coupons and use them week after week in order to keep the savings going. In other words, it requires some action on their part.

Contrast that with a family (maybe the same family) that decides to cut expenses by cutting back to basic cable or even no cable at all. This might result in a savings of $50/month or so. Once the initial change has been made, that $50 savings will continue month after month with no additional effort on the part of the family. That is passive savings.

Savings for their own sake are much less powerful than savings put to work. For that reason it is important to make sure that any reduced expenses are used to achieve the goal of paying down debt.

1. Identify ways in which money can be freed up through passive savings. See the sidebar for ideas.
2. Take the steps necessary to put the passive savings into place.
3. Determine the dollar amount of the passive savings that are created.
4. Apply that dollar amount each month to the debt that is currently being targeted (either the highest interest rate debt or the debt with the lower balance).
5. Once that debt is paid off, apply the passive savings amount to the next debt until all debts have been paid off.

It is important not to let the passive saving amounts be swallowed up by other budget items or unnecessary expenditures. In order to make passive savings work to pay down debt, you must give it a job. Step #4 is so important.

For more information about paying down debt visit Dave Ramsey Debt Relief.