Baby Step Two – Pay-Off Debt with the Debt Snowball
March 16, 2010 by: Dave Ozment
Welcome back to my continuing break down of Dave Ramsey’s Baby Steps. These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.
I personally find these steps simple and easy to follow but also elegant and effective.
In previous installments I covered:
Baby Step 1 – $1000 Emergency Fund
Today, we’ll examine Baby Step Two.
Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball
I find that there is a psychology behind calling these steps “baby” steps. Why not “Financial Steps”, “Budget Steps”, “Money Steps”, or “Road to Wealth”? All of those names are accurate and they sound much more sophisticated.
Baby Steps just seems… basic.
And there it is. These steps are obvious but not easy. They are gradual and educational. As you matriculate through these steps you learn and grow and become more empowered, just as a young child learning to explore their surroundings.
But the Baby Step convention is also a little humbling. Face it, everyone has a financial plan – good or bad – and subverting that plan to a set of “baby steps” may seem like a covering ground already traveled.
I felt that way when I first heard of the concept.
“Baby Steps to Financial Freedom… ha, I bet I’m already half way up the curve”… and that’s when Step Two kicks you square in the forehead – Pay off all your non-mortgage debt. What? That’s the dream and you’re telling me that it’s only the second step? Wow, this plan is serious.
For too many years the idea of getting completely out of debt was a pipe dream. Debt is just what we do. But the more I listened and heard stories of others doing it – it is possible – the more I began to buy in. The more I wanted in!
But how?
Again, Ramsey’s plan is simple, which makes it an easy target.
Assuming all your debt is current or easily made to be current, Baby Step Two calls for:
- All your non-mortgage debt to be prioritized smallest balance to largest
- Minimum payments are made against all debts
- All extra dollars are plowed into the lowest balance
- As that debt is paid off, those payments are rolled forward into the next smallest balance
And so the debt snowball is born. Like a rolling snowball picking up more and more snow, the debt snowball picks up more and more dollars as it advances.
The most vocal criticism to this approach is – I think – largely semantic and mostly missing the point.
For starters, assuming you agree that shedding non-mortgage debt is a good thing, then barking at Step Two is like shunning a super model because of a pimple on her bum. There’s just too much goodness involved to trip over a minor detail.
But people do what people do and the best I can add to the mix is my opinion, so I will.
The semantic is simple, debts should really be arranged by interest rate and not by balance. This way you will save more interest over the life of the process. The snowball still rolls, but from high to low interest rate rather than low to high balance.
OK, on paper that makes sense but it kinda misses the point. If logic and math are the guides, then why do you have debt in the first place? Credit cards and car payments and student loans defy logic but define the norm.
Personal finance is personal. It is not about jockeying a calculator but rather about wrangling the dude in your mirror. If I could control the guy I shave with, I’d be skinny and rich… so goes the saying.
That’s where starting with the smallest balance make sense because it allows you to experience an early win. An early diet of low hanging fruit fortifies you for the long haul. New Presidents don’t take office with a 1200 day plan, but rather a 100 day plan. It’s an emotional game and we’re emotional beings. Having an early success nourishes our soul. It’s primal.
But in the end – smallest to largest, highest to lowest, inside out, sideways, backwards, and upside down – the name of the game is eliminating debt and changing your spending habits. If you fudge an edge in Step Two that’s mostly ok so long as you don’t lose your way to Step Three.
Stay tuned for upcoming installments in this series:
Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses
Baby Step 4 – 15% Earnings Invested for Retirement
Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)
Baby Step 6 – Pay-Off the House
Baby Step 7 – Save, Invest, and Get Rich
Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well. While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.
Read, Enjoy, Comment, Subscribe!
I’ve Paid For This Twice Already – step 2
Photo By: nur- u ay
I heard “Debt Snowball” before it is a debt reduction strategy, whereby one who owes on more than one account pays off the accounts with the smaller balances first, proceeding to the larger ones later. That is one of the good strategy to pay debts…
Thanks for posting this informative article , I really found it helpful. ^_^
I review both methods with my clients. I usually refer to Ramsey’s method as the snowball and the higher to lower interest rate method as the Avalanche. I find all clients are different, some like to see the small balances getting knocked out because they are feeling progress being made, and others take a more analytical approach and go interest rate straight down the line. I even have some clients that do a mix. They focus on high interest rates, but if they have a few small ones, they knock them out of the way, and then go for the high rates. Everyone is different, the main thing is just to find something that will motivate them to stick with it.
Damon Day´s last blog ..Damon Day and Associates Responds to Anonymous Attack
I briefly read through my bro in law’s Dave Ramsey book and came across the Debt Snowball idea. It’s brilliant. Pay off those damn student loans quickly by living like a college student and using the Debt Snowball method
Mak´s last blog ..Financial Intelligence: Budgeting
Spot on Mak… I made the same mistakes coming out of college and spent more than I made… but taking is slow and paying cash as you go is a long term winning plan… using a tool such as this to visualize the path to debt freedom was very helpfu for me.
Thanks for commenting.
Dave
As someone who has used Dave’s methods and, especially, motivation to get ahead financially, I never tire of seeing this great message spread far and wide. I actually have a post up today that shares our story towards debt freedom, and the debt snowball was an integral part of it!
Dustin | Engaged Marriage´s last blog ..Our Debt-Free Marriage: How We Paid Off $54,500 in the Name of Freedom
Thanks for pointing it out… I’ll have to take a look.
Dave
Thanks a lot for sharing my sire with your readers Dave! As always it is always appreciated.
there’s a great story of paid off credit cards on my site today. Dena from Evolution You wrote it. It’s excellent!
Brad Chaffee´s last blog ..My Journey to Financial Freedom | Part 1: The Fall
I’ll have to check it out… thanks for the great content!
Dave
ACK! It makes me crazy when I hear that old Ramsey maxim – you weren’t doing math when you got in to debt, so why use it to get out? That’s like saying “You weren’t watching your caloric intake and exercise when you were getting fat. so why pay attention to them when you’re trying to get healthy/lose weight?” It makes absolutely no sense at all, on any level.
Hey Lara, I love it when you comment. You always have a strong opinion and keep me on my toes.
I understand what you’re saying but no surprise I’m not in 100% agreement. I think getting out of debt is no more a math problem than getting into debt and frankly I think losing weight is no more a calorie counting exercise than getting fat. The idea is to get your ass in gear and get something done. I tried to illustrate in the article that actually doing something and achieving a tangible measure of success is rewarding and inspires the next series of steps.
If the first pound you lose is a plateau then its easy to give up. In the same way if your highest interest loan is an $8k visa then a feeling of success is no closer today than it was yesterday even if you’re now trying to cut the debt. Knock out a $700 bill then a $1500 bill to prove to yourself that you can actually do it. Don’t out think it, get busy.
Hey, thanks again for commenting!
Dave
Dave Ramsey is just making the point that MATH is not going to get you out of debt. Staying motivated, which has NOTHING at all to do with math, is how people do it. NOT by worrying about how much their interest rate is. It makes PERFECT sense!
People stay motivated by paying off their smallest debt on the list, it has been done and proven countless times. If your highest interest rate happens to be your largest debt, how long do you think it will take the AVERAGE person to receive the benefit that comes with the quick wins that Dave Ramsey is talking about after paying something off? just a thought…
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