You will be able to set a starter buffer amount and explain why it comes before extra debt repayment.
A lot of debt plans fail for a simple reason: nothing sits between the person and the next unplanned cost. When every spare dollar goes to the debt, the bank balance stays near zero for most of the month. The first unplanned cost then has nowhere to go except the credit card you are trying to clear.
Take someone three months into a debt plan (the figures here are examples). They cut their spending and sent every spare dollar to their credit card, and the balance fell from S$3,000 to S$2,200. Then their phone screen cracked. They had S$40 in the bank, so the S$380 repair went on the card. The balance went back up to S$2,580 (S$2,200 + S$380), and three months of effort felt wasted.
This does two kinds of damage. The first is the one everyone sees: the card balance rises and interest is charged on the new amount. The second is to morale. Watching a balance climb again after months of progress is when many people decide debt plans do not work for them. In this example the debt plan itself was not wrong; it only lacked a small cushion.
Setting aside a small amount of cash before you put everything into the debt breaks this loop. The next surprise is paid from the cash instead of the card, and the debt keeps falling.
A starter buffer is a small amount of cash, kept separate from your spending money, that covers the common surprises of everyday life while you repay debt. Typical ones are a GP visit and medicine, a dental problem, a phone repair, an urgent appliance replacement, or a last-minute flight home for a family matter. These usually cost a few hundred dollars, occasionally a little more, and most people have a few of them a year.
A starter buffer is not a full emergency fund. It isn't meant to cover months of expenses after a job loss; the full emergency fund comes later, in lesson 6.2. It is also different from the sinking funds in module 3. Sinking funds pay for costs you know are coming, while the starter buffer pays for costs you could not see coming.
Keep the buffer small on purpose. The longer you spend building it before tackling the debt, the more interest the debt charges in the meantime. Size it to stop the card being used for surprises, and no bigger.
Size it from your own past year rather than from a round number on a website. Go through your last twelve months of statements and list every cost that was unplanned and could not wait. Find the largest one and round it up a little. That gives you your starter buffer amount.
There are two adjustments to consider. If your largest surprise was very small, you may still want a minimum that covers a typical dental or medical bill. If it was very large, for example a hospital stay, check what your insurance actually pays before you size the buffer around it. Also think about whether a cost that size belongs in the starter buffer at all, or in the full emergency fund.
Wei Ling did this with her past year, using figures invented for the example. She found three surprises: a GP visit and medicine for S$90, a cracked phone screen for S$380, and a cracked tooth that cost S$720 after her company's medical benefits paid. The tooth was the largest, so she rounded S$720 up to a starter buffer of S$1,000.
Keep the buffer separate from your spending money and fill it with your extra money first. Once it is full, send all your extra money to expensive debt, on top of your minimum payments, until that debt is cleared. Expensive debt means high-interest debt, such as credit card balances and credit lines.
Wei Ling started with S$200 in savings. Under the plan she set up in lesson 5.4, she has S$480 of extra money each month. In month 1 she put all S$480 into the buffer, which brought it to S$680 (S$200 + S$480). In month 2 she put in S$320, which brought it to S$1,000 (S$680 + S$320), and the remaining S$160 (S$480 - S$320) went to her card. From month 3 onwards the card gets the full S$480 on top of its minimum payment.
During the repayment stage the buffer does not grow. You only keep it topped up. If you use it for a surprise, pause the extra debt payment, refill the buffer first, then go back to the debt. If Wei Ling has to use some of her S$1,000, she pauses the extra card payment, refills the buffer, and then goes back to paying down the card.
The order is fixed: starter buffer, then expensive debt, then a bigger buffer. Once the expensive debt is cleared, you move on to building the full emergency fund.
Go back through your last twelve months and find the surprise bills. List each cost that was unplanned and could not wait, note the largest, and round it up a little to get your starter buffer amount.
Look back at surprise costs in the past year and set your starter buffer amount from the largest one.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).