The M-Network is currently doing a series highlighting Dave Ramsey’s 7 Baby Steps for getting out of debt and getting for you life on the right track financially. You can read about all of the steps over on Cash Money Life who kicked things off with a great introduction. As other members of the network add their articles, I’ll add them to the end of this article.
Once you have decided to commit to not adding debt to your life, and have saved a $1000 emergency fund, Dave Ramsey’s next step is to pay off all non-mortgage debt using the debt snowball. The concept is pretty simple. List all your debt (except the house), in order from smallest balance to largest. Figure out how much money you can pay to debt each month (as much as you possibly can) – this is your debt snowball, and must be at least all the minimums on your debts, preferably much more. Then pay the minimum to all the debts but the one with the lowest balance, that one, pay the entire remainder of your debt snowball. Repeat, and repeat, and repeat, and repeat. Once that debt is eliminated – do not reduce the debt snowball! This is key. Move the debt snowball onto the next smallest debt. Repeat until all your debts are gone.
The idea is simple and powerful. It has helped many many people who were stuck in debt and felt there was no way out to find their way. The idea has also come under fire for one main reason – paying the debts smallest to largest costs you more money (in interest) than paying down debts highest interest rate to smallest. Ramsey argues that this is about behavior modification, not about saving a few dollars, and if math was the only issue we wouldn’t be in debt in the first place. The psychological boost from eliminating those smaller debts are the motivation you need to commit to eliminating the larger ones.
I can see both sides of that argument, and honestly, I think it comes down to what motivates you. For me – what I needed was a clear idea that I could make progress on my debt if I committed to paying it down with intensity, but I got that motivation from watching the balance of the highest interest rate one shrink. It honestly would have been unmotivating to me to start with the smallest balance debt and work up to the largest, because my interest rates were so different between them and I have been accused before of being a bit of a numbers geek. It would have just irked me. I know this for a fact, because now that the credit card is paid off, my car loan is the smallest debt (with the smallest interest rate) and my spouse has suggested several times we just take care of that next instead of the student loans, and I get my hackles raised at the very idea. However – I didn’t have any tiny little debts of a few hundred dollars or less. When I started, my smallest debt was still about $6000, so even starting with that, it would have taken a while to pay it off anyway so the psychological boost would have been long in coming. For me, it was enough to keep track of my credit card balance shrinking day by day to get that boost I needed. If I had had some tiny debts, I might have wanted to just get rid of those first, so I can see how that would be satisfying.
So, as you’ve figured out, my debt snowball is used to target my debts from highest interest rate to smallest. I figured out that I could budget $810.41 month after month to debt reduction – which was minimum payments on my student loans and car loan, and $200 to my credit card. Now that the credit card is paid off, that $200 is moved onto the highest interest rate student loan, added to the minimum I was already paying, and used to pay down that debt faster than before. I don’t stop there, however (and Ramsey doesn’t feel you should stop their either – you should throw everything you have at the debt you are targeting). I practice what I call snowflaking – which basically is finding more money every month through frugal living and increasing income, and throwing that at debt as well. If we get a windfall, it goes to debt reduction. If I sell something, the profit goes to debt reduction. It is a motivational spinoff of the Ramsey principle of prioritizing debt reduction to get it done. There are a lot of other bloggers using snowflaking for debt reduction (or for other ways to improve their financial health) at the Snowflake Revolution.
All in all, in my life, I’ve found the debt snowball idea a very useful one, and have adapted it to fit my own motivational needs. We all need to understand ourselves and what motivates us to be successful, and use that to our advantage. Make sure to visit Being Frugal tomorrow for a discussion of Baby Step 3: Save up 3-6 months of expenses in savings, which Ana at DebtFREE-Revolution is now ready to move on to. Congratulations at paying off your last debt but the house this week, Ana!
Here are all of the articles thus far from the M-Network series:
- Overview at Cash Money Life
- Step 0 – No More Debt at Debt Free Revolution and Single Guy Money
- Step 1 – $1000.00 Emergency Fund at Gather Little By Little
- Step 2 – Pay off all debt using the Debt Snowball right here!
- Step 3 – 3 to 6 months of expenses in savings at Being Frugal
- Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement at The Dough Roller
- Step 5 – College funding for children at at My Two Dollars
- Step 6 – Pay off your mortgage at Moolanomy
- Step 7 – Build wealth and give! at Plonkee Money
- Series Wrap Up at Being Frugal and right here!