Personal Finance 101 - The Debt Snowball

Personal Finance 101 - The Debt Snowball

If you have just arrived in this article, I suggest you read the previous article about this personal finance writing inspired by Dave Ramsey's series book. Take your time and read it carefully, I ensure you will get insight from this article series.

This is the third part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.

Be Debt-Free


Baby Step #2 in Dave Ramsey’s Total Money Makeover is really the crux of the plan. It’s the one that stands out as - well, weird. It’s different than most financial plans out there. It goes completely against the grain of what today’s culture feeds us (my favorite line is “there’s good debt, and there’s bad debt”). It’s this - be debt-free.

He’s not kidding. He’s not talking about just credit card debt, or only consumer debt, or just high-interest debt. He’s talking about ALL DEBT. Become totally debt-free. This even includes your house, although that’s not until Baby Step #6. He says that our goal is to not owe a single dime to anyone.

When I first heard this, I found it absolutely overwhelming, and to be honest, it’s what turned me off to him at first. I couldn’t imagine even hoping for a paid-for house, much less being able to do it. We hardly have any debt, but my husband and I never made wealth building a goal in our life - we honestly never thought of ourselves as “average Americans.” We wouldn’t be surprised if our typical income is always below average, seeing as we could be in full-time ministry for most of our lives. And that’s okay with us. We’re fine with it.

So that’s a big reason I brushed off Dave Ramsey’s plan at first - it didn’t seem like it was for us. It was for people who cared about making a lot of money.

I’ll spare you all the details of God changing my heart on the matter, but He did. In short, He reminded me that He does care about how we steward the money He gives us and that we are no different than the people who work in “regular jobs.” We are to do well with what we have, no matter how much it is. I could go on and on about my change of heart, but in a nutshell - I now see us as people who should and could do well financially. It’s important for our family's future.

The Snow Ball Method


Moving on - back to Baby Step #2. He recommends paying off all your debts using the Snowball Method - paying the minimums on all debts except one, which you pile on any extra funds you have. When that one is paid off, you take the money you piled on the first debt and put it towards the second. Then you do that with the third, and so on and so on, until all your debt is gone. All except the house, that is. You pay that off a little later. There’s a lot out on the internet about the Snowball Method, so I won’t reinvent the wheel. A few examples are here, and here.

One thing that differs with Ramsey’s Snowball Method than other similar methods out there is that he recommends paying off the debt with the lowest balance first, not necessarily the one with the highest interest rate. Even though it mathematically makes sense to pay off your high-interest debt first, he says there’s something psychologically and motivationally charging when you pay off the small balance debts first. You feel like you’re crossing things off your list. You’re shooting down the little guys so you can get to the big kahuna faster. When you pay off several debts within a few months, you feel like you can do this. When you start with a big debt that could take years, you could easily lose steam.

There’s also a relatively new trend out in the blogosphere called snowflaking - gathering all the little funds you find here and there throughout the month and putting it towards the current debt you’re focusing on. The money really adds up, the way a snowball is comprised of lots of tiny snowflakes. There are stories out there of people finding $400 in a change in the couch cushions, so to speak. Once you start looking for any and every bit of extra money you have, it pops up out of nowhere. It really does.

So, to reiterate where we are in a Plain Jane way…

Baby Step #1 - save $1,000 fast, which becomes your Baby Emergency Fund. It will only stay this small while you’re on Step 2.

Baby Step #2 - eliminate all debt except the house using the Snowball Method.

I’ll admit right up front that I am a total Plain Jane. I am learning about personal finance at the moment, and am in no position yet to offer advice. But as I learn more and more, and build up the ability to draw conclusions on my own, I can say that so far, there really is very little I disagree with Dave Ramsey. You can pretty much take his advice and go with it. I highly recommend catching his radio show - I listen almost daily, and I live overseas. The first hour of his show is a podcast on iTunes, which is how I listen.

But on top of it all, I highly recommend buying Dave Ramsey’s The Total Money Makeover and devouring it. It’s very easy reading. I read it in a weekend. And I have two kids under 3, so if I can devote the brain cells to the book, anybody can. (And if you buy it via the link above - hint, hint - the proceeds go to maintaining this blog.)

I’ll move on to Baby Step #3, fully fund the Emergency Fund from Step 1, sometime soon. For now, I’ll leave you with a quote from Ramsey’s book about Baby Step #2:

If you think this Debt Snowball stuff is cute and you might sort of give it a try, it won’t work. Total, sold-out, focused intensity is required to win. Aiming at the goal and nothing else is the only way to win.

Many people find a way to shorten the time [to finish the Debt Snowball] with sheer intensity, and God tends to pour blessings on people going in a direction He wants them to go. It is as if you are walking or running at a fast pace, and a moving sidewalk suddenly appears below you to carry you faster than you own effort would. The Debt Snowball is very possibly the most important step in your Total Money Makeover for two reasons. One, you free up your most powerful wealth-building tool, your income, during this step. Two, you take on the entire American culture by declaring war on debt. By paying off your debt, you make a statement about your stance on the issue of debt.