What is Yo-Yo Debt?

Here's a question we get quite often:

"I’ve been aggressively putting money towards my debt but constantly finding myself back at square 1 after 6 months. Either I’m spending money again or a big expense comes up - what am I doing wrong?"

You’re experiencing what we like to call “Yo-yo debt”.

What is Yo-Yo Debt?

So you just paid off last month's credit card, and you settle in for the night. You reward yourself with a nice glass of wine to celebrate. You're debt-free! Over the next two weeks, however, you realize that the money you've set aside for groceries and other living expenses isn't quite enough...you'll need to dip into your credit card to get by until the next paycheck.

This occurs when people are attempting to pay off debt but find themselves unable to cover other major expenses. This causes a cycle in which the previous period's debt is paid (or partially paid), but the person must take on more debt for the next month.

How Do You Stop This? Pay Yourself First (Cliche, I Know)

When you get your paycheck, don't immediately allocate all your money to debt payoff. We recommend first putting some cash towards your savings, and then putting the remainder towards debt and expenses. Emergency savings will be incredibly important if and when an unexpected expense surprises you, and can help smooth out any bumpiness along your debt freedom journey.

How much you save each month depends on what your budget looks like - we recommend allocating about 10% of your income towards savings, 20% to debt payoff, 50% to your basic expenses and 20% for any other discretionary expenses. If you want to be a bit more aggressive, consider allocating a combined 40-50% towards both savings and debt payoff, while keeping the remaining 50-60% for expenses. Try to save up enough for 6 months of expenses in just your emergency fund before moving on to goal-based savings (house, car, retirement, etc).

Budgeting Sucks Right? Spend Consistently and Sustainably

You don't have to deprive yourself of all pleasures in order to live a financially responsible life. But do make spending a deliberate, premeditated choice rather than an impulsive splurge. Think of yo-yo debt as two steps forward and one step back—if you stop focusing on the big picture and start splurging after your paycheck, you could be stuck in this cycle for years.

Your life Without Yo-Yo Debt

Imagine this instead: You sit down for a glass of wine after your most recent paycheck. You've budgeted for your expenses over the next two weeks, and you've allocated some of your paycheck to steadily pay down debt. Maybe you’re not going to 0 balance on your credit card yet, but you're content and relaxed, knowing you've made another gradual step along your debt freedom journey.

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