Baby Step 2: Pay Off Debt Using the Debt Snowball

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:


  1. lu3 Says:

    February 28th, 2008 at 10:04 am

    One argument I never see in the Lowest Balance vs Highest Interest Rate discussion is the flexibility that the Lowest Balance system builds into your finances over time. For instance, if I have 12 debts (credit cards, car loans, student loans, etc.), I have 12 minimum payments that I have to pay each month. Once the lowest balance is eliminated, I only have to pay 11 minimums each month. By the time I have reduced this to 7 or 8, I achieve a certain flexibility in my monthly budget which can be really helpful if an unexpected expense comes along. In any given month, if I have to suspend the debt snowball to deal with a money crisis, the total of the minimum payments I have to make is much smaller than if I were working on the Highest Interest Rate balance and still had 11 or 12 minimums to pay. This frees up more money to deal with the crisis.

  2. paidtwice Says:

    February 28th, 2008 at 10:07 am

    @lu3 – that is true, and that is actually my spouse’s reasoning for wanting to hit the car loan next. For us though when we started, hitting the credit card first actually bought us that flexibility much faster because its minimum went down every month, as opposed to our other fixed debts. All of our balances were high so there would have been no quick victory/elimination whichever we chose.

    Thanks for weighing in!

  3. renegade Says:

    February 28th, 2008 at 1:01 pm

    I agree with lu3 and have found that to be a huge advantage. I need that cushion. But I’m ok with either way. However, I have figured out that you only gain about one month maybe two at the most by attacking the high interest rates one first vs. paying the lower balance ones. Yes, my debt snowball is probably much higher than most ($1500), so I would save around $3000 at most. But I look at it using both ways. I’m trying to find the higher minimum payment in my snowball with a lower total amount to pay off. I have several small items (less than $1000) but I have one credit card that is only $1800 but the minimum payment is $100. I’ve have figured out that by paying that one off first which is also the highest interest rate, then I can gain $100 to snowball with and therefore shorten my timeline by three months.

  4. Shanti @ Antishay Ventenne Says:

    February 28th, 2008 at 3:10 pm

    GREAT POST! I also agree with you that if you can keep your head around the long-term, paying off highest-to-lowest interest is the way to go. I wrote a whole post about it over here:

    I read a post at Five Cent Nickel called Dave Ramsey is Bad at Math:

    It inspired me to write the post linked to above, where I debated Dave Ramsey’s MTMO against David Bach’s The Automatic Millionaire. All in all, my conclusion was the same as yours: if you need to psychologically boost yourself by paying off a small debt, go for it! But if you’d rather pay as little as possible overall and not get discouraged by delaying your “successes,” the highest-interest-first plan is a good way to go :)

    I am loving the M-Networks review of the baby steps! Thanks!

  5. Small Cents Says:

    February 28th, 2008 at 3:15 pm

    Great post, and great topic. I’m a snowflaker, and now that I’ve paid off my last open ended debt and established a €1000 emergency fund thanks to my sudden windfall (to be discussed soon on SmallCents!), I’m going to divide my snowflaking in two to establish a bigger emergency/moving fund, as well as paying off the other debt. I think that I need the psychological security even though the numbers don’t add up.

  6. paidtwice Says:

    February 28th, 2008 at 3:20 pm

    @Shanti – there is actually a link to Five Cent Nickel’s math post in my post above as well. lol

  7. JoeTaxpayer Says:

    February 28th, 2008 at 6:31 pm

    I’m glad you see the flaw in the original debt snowball math. As you mention, the difference between high and low rate loans can be 12% or more. The $1000 sent to the 24% card saves you $20/mo, but to the 6% student loan is just $5/mo. Dave’s goals are great, I agree, high interest debt is a killer, his approach can just use some fine tuning.
    BTW, the $1000 emergency fund can cost $240/yr. Are there that many potential emergencies that cannot be addressed by using the card again if need be? A few good years and that $1000 can save $2000 or more in interest. (At 2%/mo, money doubles in three years. Yikes!)

  8. paidtwice Says:

    February 28th, 2008 at 6:37 pm

    Um… you’re talking to someone who just fought her way through a ~$3600 car repair…. emergencies happen to me. More than I’d like. lol

  9. Debt Free Revolution Says:

    February 28th, 2008 at 11:13 pm

    I’ll second PaidTwice on the “emergencies happen” statement. I had three during the time I worked through baby step two: the furnace broke ($1140) and two car repairs ($538 and $509), so I am just not seeing how having a “baby” EF will cost $240 a year. Besides that, Baby Step ZERO is “No More Debt” so using the cards again is not an option. The object is to eradicate the debt: kill it, eliminate it, destroy it, and remove all traces of it off the face of the earth!

  10. That One Caveman Says:

    March 7th, 2008 at 12:27 pm

    I know I’m late for joining in the conversation, but I wanted to add one vector that people often don’t consider: the tax impact of various loans. We decided to pay off the car first, not because it had the highest interest rate or the lowest balance, but because it was the only loan that didn’t give us an advantage come tax time.

    Once our car is paid off later this year, we’ll work on paying down the home equity until we reach 80% total loan to value and we can take control of our escrow — allowing us to gather a much higher rate on that money than we can get in its current state. After that goal is reached, then we’ll attack my wife’s student loans and finally come back to the home equity and mortgage once those debts are eliminated.

  11. paidtwice Says:

    March 7th, 2008 at 1:10 pm

    Hey Caveman, that is an excellent point! I should have mentioned that :)

    Because my spouse’s student loan is at 9% and the car is at 4%, the difference in interest far outweighs our tax advantage. BUT – if it was my student loan (at 7%) we’d have to discuss it all more carefully. As it stands now, by the time I address my student loan, the car will already be paid off.

  12. Bill Says:

    March 22nd, 2008 at 2:23 pm

    Here is another idea to throw on top of the debt. It takes a little painting first to see the big picture. Here is the basics we will work with in this example. Say you have high interest credit card, and most of you have high interest if you have a balance over 2 years because the terms of the card state that they will take the interest for the month as a “cash advance” and cash advances are at 29% plus rates. When you make your payment it is applied to the LOWEST interest earning balance, so over time your balance is converting to the higher rate.

    Okay here we go you have a balance of $3000 on our imaginary CC at a rate of 19.99% (I know some of you would die for these kind of low rates) Your minimum payment is $120 and the interest on the balance of 3k is $47.50 a month. (which converts to 29.99%by cash advancing) For this to work you must itemize your household budget and figure out how much you spend with debit card, check and automatic withdrawal that you can pay with your high interest credit card. (be patient read on).

    Let’s assume that each month you are spending $1,000 a month on gas, grocery, utilities, entertainment and fun money from your debit or checking account. Take that $1000 plus the $47.50 in interest and make your monthly payment. Then as the month goes along charge the $1,000 back onto the card. Here is what happens… First the $1,000 is sitting in the interest free grace period and your interest for accruing for the month on the remaining 2k has dropped to $33.32 saving $14.18 a month. Plus because you made the $1,000 cash flow payment you have no minimum payment (except for the interest payment to stay even with the balance) so you can add $72.50 to the debt you are snowballing!!!!

    Second month you pay $1,000 + 33.32 to the Credit card and $$86.68 to the snow ball target account. Total monthly savings = $86.68. Yearly savings of $1,040.16 IF this credit card is your snowball debt target you pay it off in 2 years WITH OUT changing your current spending habits. The banks would rather you did not use your credit card as a tool. They want you to look at it as a safe way to spend. Okay now you guys who are already beating up your calculators let me know where this is wrong. My fiancée paid a 87k mortgage off in 6 years by doing this, by creating CC debt with balance transfers to the credit card from her mortgage principle and cash flowing the debt away with her disposable income. Good luck. Write if you want other ideas as my friends say I’m full of em’ or was it it?

  13. Chris Hutcherson Says:

    September 29th, 2008 at 4:24 pm

    The biggest thing ever to help our family was reading Total Money Makeover by Dave Ramsey. Not only did we cut our credit card bills in half each month, but we only took out half the amount of trash as we normal did, one can instead of two! Amazing how far a little effort goes. :)

  14. Joe Says:

    January 23rd, 2010 at 12:08 pm

    I would offer serious disagreement to paying off a Federal student loan before a car loan. You don’t give any specifics, however you should take into account the following:

    -> Student loans can often be placed into deferment or forbearance if you’re unable to pay. A car loan cannot.
    -> Student loan interest can be tax deductible based on your situation, which can decrease the real interest rate of the loan up to your federal tax bracket (i.e. for 25% tax bracket, at 6.8% student loan has an effective rate of 5.1%).
    -> Student loans are forgiven upon death.
    -> A car is a rapidly depreciating asset, so you can become upside-down on your loan quickly. The value of your education and career can increase over time.