Dave Ramsey’s Baby Step #2 The Debt Snowball
Once you have your baby emergency fund in place now you start to tackle your debt. What Dave Ramsey suggests is to make a list of all your debt (except for the house) from smallest to largest. Make only the minimum payments on all of them except for the smallest which you attack with a vengeance getting rid of this one as fast as you can. Once you have gotten rid of that one, take the amount you were paying on that debt and apply it to the #2 along with the #2 minimum payment and so on. Each time you finished off a debt the payment applied to the next would get bigger and bigger hence the “snow ball” effect. You will target one debt at a time and compound your payment.
Here is an example…
• Store Credit Card $ 625 balance $ 25 minimum payment
• MasterCard $ 640 balance $ 35 minimum payment
• Medical Bill $1,225 balance $ 50 minimum payment
• Discover $3,250 balance $ 75 minimum payment
• Visa $7,250 balance $100 minimum payment
• Student Loan $8,600 balance $150 minimum payment
Lets say you are able to squeeze out another $100 per month to pay down your debt, this means you will be making a payment of $125 on your Store Credit Card taking you a total of 5 months to pay it off. You would then take the $125 and add it to the MasterCard’s minimum payment for a total of $160 per month and in about another 4 months this one would be paid off. You would then take the $160 per month and add it to the Medical Bill’s minimum payment for a total of $210 and so on. Each time you paid off a bill the amount you applied to the next would get larger until all of them were paid off.
There are some analysts that say you should pay off the debt with the highest interest rate first, which in theory would be the best money saving way, however; Dave Ramsey’s using a more psychological approach. By knocking off the small debts you get quick results and this helps you gain the momentum to continue. You are able to see progress much faster and therefore stay on track longer.
Through baby step #2, you continue to squeeze every dollar you can out of your budget to throw toward your debt. Dave even suggests getting a second or third job if you can. Your budget should be so tight that you are not doing anything that is recreational. He often says… “you don’t see the inside of a restaurant unless you work there”.
So grab your hat and mittens and get your debt snowball rolling!