Dave Ramsey has quickly become a popular icon to many who are taking part in the war on debt. He boasts radical ideas about “living like no one else, so you can live like no else” once you are debt free. And his plan is very simple, which is what makes it so appealing to many. Beginning with an emergency fund, Dave teaches that you must prepare for rainy days even when you are trying to get out of debt. He recommends saving at least $500 to $1,000 in a savings account prior to beginning your debt payoff process. And once you have completed the emergency fund, Dave instructs fellow debtors to begin what is called “The Debt Snowball.”
How Does the Debt Snowball Work?
First, you want to get a piece of paper and list all of your debts from smallest to largest. Be sure to include the name of the debt, the balance, and the minimum payment. Make an extra spot next to each debt for your snowball payment or “new payment.” Using Dave’s Debt Snowball strategy, you begin by paying as much as possible towards the smallest debt in your debt list: essentially, taking baby steps towards financial success. Be sure you are still paying the minimums on everything else, while you are paying off the smallest debt. Basically, don’t ignore your other debt. Making late payments (or no payments at all) to other debts will be harmful to you.
Once you pay off the first debt on your list, you take the payment that was going to that debt and add it to the minimum payment for the second debt. Continue to do this as you pay off each debt, which will create a metaphorical debt snowball (one debt payment building upon another). The basic key to Debt Snowball is to focus on one debt at a time while maintaining everything else. By the time you get to the last debt on your list, you will be applying a huge payment to that debt because it will be the cumulative payments of all the other debts that you have already paid off.
Frequently Asked Debt Snowball Questions
1. Don’t most experts recommend paying debts with the highest interest rate first?
Yes, that is correct. Most financial experts will tell you to pay debts with the highest interest rate first. However, many people — including Dave Ramsey — have come to realize that finances are not just about numbers, they are also about behavior and emotions. Your emotions do affect your behavior; therefore, Dave’s Debt Snowball theory tells us that when you achieve small victories (such as paying off the first couple of small debts), then you will receive an emotional boost. This emotional boost will propel you to keep going and pay off even more of your debt. Many people who try to pay off the high interest debts first often end up losing momentum in the very beginning and giving up because the large debt may seem too intimidating.
2. How can you pay more towards a debt when you can barely afford minimum payments?
This is Dave Ramsey’s mantra: “Live like no one else, so you can live like no one else.” This may mean that you need to get a second or third job to pay your debts. It could mean giving up meat at the grocery store and eating beans and rice every night for dinner. Dave is into radical debt payoffs and doing whatever it takes to get the debt out of your life. This includes sacrificing many luxuries now, that are not necessarily “needs”, in order to gain financial freedom so you can live like no one else later. This means having a significant amount of extra money each month after you are debt free! Once you get all your debts paid off, you can start building your savings with Dave Ramsey’s Budgeting Tips for Successful Savers.
3. How can the debt snowball work for you?
This debt payoff strategy has worked so well for so many people that many financial gurus and experts have changed their tune when it comes to a debt payoff strategy. Many are now promoting the Debt Snowball because they see it working for so many individuals. Emotions truly do play a part in your finances because different feelings cause you to act differently. Moreover, how you act affects your money and how much of it you save or spend.
As you’d expect, I highly recommend the Debt Snowball strategy. I have been using this strategy for a while now, and it was a great boost to get three smalls debts out of the way. Now I am focusing on larger debts, and even though they are daunting, I have confidence that if I keep working and paying them down, they will soon enough be paid off just like the smaller ones!
Contributing Writer: Selena
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{ 11 comments… read them below or add one }
I totally agree! The only debt I have is a mortgage which has a loan to value of 20%. I increased my monthly payment in order to pay it off in 6.5 years when I retire.
it is important to always spend a little time each year or quarter even to write down what you a re spending your money on and take a look to see what you can do without and what you really need.
I think there is a huge opportunity if someone can figure out how to do a hybrid of Ramsey’s method with the method of paying down the accounts with the higher interest rates first. If people can get the same motivation as the snowballs from paying down the highest rate accounts first, they could save a ton in interest. Unfortunately, it sounds like a lot of people can’t.
Knock on wood, I really haven’t run into this problem myself. I visualize debt as one big blob. The goal is to chop the blob down to size – with little regard to which portions of the blob are being sliced away with my scalpel of debt.
While it’s a good point to pay off small debts for motivational “small victories” I have to disagree here. I definitely feel that the huge, crushing debts have to be taken care of ASAP. If the debt is from an agency/entity (like the IRS) that has the power to issues liens or levies, get into a plan that wipes off that debt as a first priority.
Knock out the high interest debt first and you will save more in the long run.
Surely there could be some kind of compromise, where you pay off the smallest debts that also have the highest interest first. The debt snowball is a great idea, since there’s no doubt it would give a boost to pay off the smallest debts quickly, but one could maybe group the debts into small and large, and then work on the small ones with the highest interest first.
I agree with a few points. Knocking out the highest interest rates (or consolidating in to a new loan at a better rate) is paramount. Sure, there are emotional rewards for removing accounts, but if part of the debt portfolio is a payday loan then that should surely be the focus, regardless of size.
Also (warning : we’re biased), pursuing activities which have the biggest impact on creditworthiness can lead to lower interest and a better total outcome. That’s why folks should be careful about keeping lots of cash in the bank AND high interest debt. Cash for a rainy day is great, but a bank line can serve the same function with lower “cost”.
Great article, I agree with pretty much everything you’ve written – will be reading this blog more often!
Dave Ramsey might be a nice guy, and sincere, but the debt snowball is lunacy. It’s getting a cavity filled while ignoring the deep axe wound in your chest.
“…finances are not just about numbers, they are also about behavior and emotions.” The timeshare was so shiny, I couldn’t say no! If you’re going to act irrationally – i.e., making financial decisions with your heart and not your head – you’re practically asking to be fleeced. Building wealth and falling in love are two different things.
It seems a few of the commenters have little understanding of real world finances for the typical family. The simple fact is that Ramsey’s method works for far more of those who use it than any other method here in the real world. The amount of interest that would be saved *if* you were to follow the “highest interest rate first” strategy is more than offset by the number of people who try that, become discouraged, and quit. Besides, with Ramsey’s method the debtor should be radical enough that the payoff would usually be so short that the difference in interest is usually not that substantial.
If you are sophisticated enough to be able to do it by the “most logical” method, then I have a simple question: why did you get into a hole in the first place? Dig deep enough, and it is often an emotional reason–so working with your emotions to help you get out of that hole makes perfect psychological sense…which is why it works so often for so many tens of thousands of families who try it.
Personally, I have had no debt for some years now, although my income has fluctuated wildly. We close next week on a second condominium apartment, so my mother in law will have a place nearby since she lost her husband a few months ago and will be moving here soon. It will be paid for in cash, as was this one…although at considerable sacrifice including no car or car expense, no eating out, shopping in second hand stores for the most part for most clothing, etc.
Unless you have paid off your debt load, you have no idea how liberating it is. To get there, though, it may be a good idea not to over think things, but to try the debt snowball method successfully used by so many thousands.
I love Dave Ramsey and I enjoyed your summary of his debt snowball.
I used Dave’s method to pay off my 2 cars about 2 years early per car. I then used the same money to pay off other debt. I focused on the balances with the lowest balance first to build momentum.
I’m really not a fan of Dave Ramsey’s method at all. The goal is to get out of debt, the fastest way to get out of debt is to get rid of the highest interest rate cards first.
I guess if that’s the only way people can accomplish their goals, (small moral victories) then it works, but the math just doesn’t add up for me