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Debt Elimination: Step 4 – Dave Ramsey’s Debt Snowball

Today we’re going to tackle the fourth step in the process of overcoming your debt.  Before we get into those details, let’s take a look at the five steps.  In order, they are:

  1. Cut Expenses
  2. Maximize Income
  3. Get Current on Everything
  4. Use the Dave Ramsey Debt Snowball to Arrange Your Debts
  5. Make a Call Every Time You’re Ready to Pay Something Off

Since we’ve already covered steps 1, 2 and 3 (Cutting Expenses, Maximizing Income and Getting Current on all your past due bills, respectively), today we’ll discuss step 4: the Debt Snowball.

I love Dave Ramsey.  He is awesome.  When Stacy and I paid off our mortgage (our very last debt), we drove to Nashville so we could scream “I’m Debt FREEEEEEEEEEEEEEEEEE” on the air from his studio.  It was a wonderful experience and meeting him was quite cool.  Most of my teachings line up with his and while there are many nuances where we differ, I can’t find any good reason to deviate from his plan on how to tackle your debts.  So let’s go over what the debt snowball is and how it works.

Get Everything in Order

First, you need to know what your debts actually are.  Find out ALL of your debts, what each requires as a minimum payment and the overall balance you owe.  Ignore interest rates.  Order those debts smallest to largest based on the overall balance.  Pay minimum payments on all of your debts EXCEPT the one with the smallest balance.  Put every extra penny you can scrape together toward paying off that smallest debt.  When it is paid off, you can put the required minimum payment it had on your next smallest debt, as well as every penny you can scrape together toward killing that one.  Simple, right?

The Why

Mathematically, this approach makes no sense.  But as Dave says, this isn’t about math. If you knew the math, you wouldn’t have gotten into these messes in the first place.  So we’re not worried about the interest rates or things like that.  We’re looking strictly at paying off the debts – making them go away.  When I teach, I put it this way: imagine yourself in a dark alley late at night.  Out of the shadows steps ten scary goons.  If I have the option to either make the biggest one smaller or make the smallest one go away, I’m going to choose that second option EVERY TIME.  The debt snowball helps you get rid of the goons more quickly because you’re getting rid of the smallest one first (and most quickly), then the next smallest, etc.  Eventually, you’re only battling one or two big goons.  By that time, however, you’ve built up the momentum, discipline and drive to beat him/them, so you win!

So that’s it.  Debt snowball your debts once you’ve cut your expenses, maximized your income and gotten current on all your debts.  Then you’re ready to start knocking them out.  Stay tuned for Step 5 because as you get ready to pay off a bill, we’ll talk about how to make a call and save some serious cash by investing 10 or 15 minutes of your time.  I’m looking forward to it – I hope you are!

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