Debt advice from Dave Ramsey
Financial expert Dave Ramsey explains the steps to eliminate debt and build wealth
What is the debt snowball and why is it so important to your plan?
A: The Debt Snowball is the second step in my plan to get out of debt and take control of your finances. Specifically, this is the part of the plan where you sit down with your budget and look at all the money you owe. Next, list your debts from smallest to largest, excluding your house, and pay them off in that order.
I know, there are all sorts of arguments for paying off those with the highest interest rates first. But it’s a psychology course, not math. Personal finance is 80% behavior and 20% knowledge. Besides, if you were that good at math, you wouldn’t have any debt, would you? Pay off your debts from smallest to largest, unless there’s a major emergency, like you’re facing a foreclosure or the IRS is knocking on your door.
The reason we pay off debts from small to large is to build confidence and excitement by making quick wins. If you’re on a diet and lose weight the first week, you’ll likely continue on that diet. If you’re dieting and gaining weight, or if you go weeks without visible progress, chances are you’ll quit. When you start the debt snowball and in the first few days you pay off a few debts, it ignites a fire under you and you start to believe that you can really do it.
After listing the debts from smallest to largest, pay the minimum payment to stay current on all but the smallest debt. Every dollar you can take out of your budget goes to the smallest debt until it’s paid off. Once the smaller one is paid, the payment for that debt – plus any additional “found” money – is added to the next smaller debt. Then, when debt number two is paid off, you take the money you used to pay on number one and number two, and you pay it on number three. When three is paid, you attack number four and so on. Many people get to the bottom of the list and find they can pay well over $1,000 a month for a student loan or a car. At this point, it won’t take long to get out and be debt free except for your home.
The main elements that make the debt snowball so powerful are budgeting, updating before you start the debt snowball, winning from smallest to largest, sacrifice, discipline and targeted intensity. If you think the debt snowball is just another trick, or something you could try, it won’t work. You must go all-in to win!
Dave Ramsey is a writer and radio host. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.