The debt snowball is your new DFBFF (debt freedom best friend forever) if you’re looking for a long-term debt relief strategy.
The debt snowball method is the fastest way to pay off your debt. I paid off $40,000 in consumer debt in just 18 months using this method, and if it works for me, it will work for you as well.
The second baby step in Dave Ramsey’s seven baby steps is to use the debt snowball method to pay off all of your debt, with the exception of your house. Now that all of your bills are paid on time and you have $1,000 set aside for your emergency fund, it’s time to start building that snowball!
If you find yourself living paycheck to paycheck and longing for a debt-free and stress-free life, the Dave Ramsey method might be just what you need. Millions of people have benefited from this tried-and-true method in achieving financial freedom, and it can do the same for you.
What is the Dave Ramsey Method?
The Dave Ramsey method is a 7-step plan that helps you get out of debt, build wealth, and live a life of financial freedom. It’s based on the belief that anyone can achieve financial success if they follow a simple, common-sense approach.
The 7 Baby Steps
The Dave Ramsey method is broken down into 7 simple steps, known as the “Baby Steps.” Each step builds on the previous one, helping you gradually achieve your financial goals.
Step 1: Save $1.000 for an Emergency Fund
This first step is crucial. It gives you a safety net for unexpected expenses, like car repairs or medical bills. This way, you won’t have to go into debt to cover these costs.
Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball
This is where the real debt-crushing begins The debt snowball method involves paying off your smallest debts first, regardless of the interest rate This gives you quick wins and keeps you motivated.
Step 3: Save 3-6 Months of Expenses in a Fully Funded Emergency Fund
Once you’re debt-free (except for your house), it’s time to beef up your emergency fund. Aim to save 3-6 months of expenses to cover any major unexpected events.
Step 4: Invest 15% of Your Household Income in Retirement
Now that you’re debt-free and have a solid emergency fund, it’s time to focus on your future. Start investing 15% of your income in retirement accounts to ensure a comfortable retirement.
Step 5: Save for Your Children’s College Fund
If you have children, start saving for their college education. This will help them avoid student loan debt and give them a head start in life.
Step 6: Pay Off Your Home Early
This step is all about taking control of your biggest debt: your mortgage. You’ll be mortgage-free much sooner and save a ton of money on interest if you pay off your house early.
Step 7: Build Wealth and Give
Congratulations! You’ve reached financial freedom. Now it’s time to enjoy the fruits of your labor. Build wealth, give generously to others, and live a life of purpose.
How the Debt Snowball Method Works
The debt snowball method is a powerful tool for getting out of debt. Here’s how it works:
- List your debts from smallest to largest, regardless of interest rate.
- Make minimum payments on all your debts except the smallest one.
- Throw as much extra money as you can at your smallest debt until it’s gone.
- Take the money you were paying on the smallest debt and add it to the next-smallest debt payment.
- Repeat steps 3 and 4 until all your debts are paid off.
As you knock out your debts one by one, the amount of money you have to throw at the rest of your debt grows. This creates a snowball effect, helping you pay off your debt faster and with less interest.
Why the Dave Ramsey Method Works
The Dave Ramsey method works because it’s based on sound financial principles and a proven track record. It’s also easy to understand and follow, even if you’re not a financial expert.
Here are a few reasons why the Dave Ramsey method is so effective:
- It’s based on common sense. The steps are simple and straightforward, making it easy to implement in your own life.
- It’s behavior-based. The method focuses on changing your financial behavior, which is key to long-term success.
- It provides accountability. The Dave Ramsey community offers support and encouragement, helping you stay on track.
- It’s proven to work. Millions of people have used the Dave Ramsey method to achieve financial freedom.
Get Started with the Dave Ramsey Method Today
If you’re ready to take control of your finances and achieve financial freedom, then the Dave Ramsey method is the perfect place to start. Here are a few resources to help you get started:
- Financial Peace University: This is a 9-week course that teaches you the Dave Ramsey method in detail.
- The Dave Ramsey Show: This daily radio show offers financial advice and motivation.
- The Dave Ramsey website: This website provides a wealth of resources, including articles, videos, and tools.
Don’t wait any longer. Start your journey to financial freedom today with the Dave Ramsey method. You won’t regret it!
An Example of the Debt Snowball
Now, let’s see an example of how this method works in real life. In this scenario, you’ve got four different debts:
- $500 medical bill—$50 payment
- $2,500 credit card debt—$63 payment
- $7,000 car loan—$135 payment
- $10,000 student loan—$96 payment
You would attack the $500 medical bill with a vengeance, making minimum payments on everything else using the debt snowball method. And if you’re really committed to reaching your objective, you might start a side business that earns you an additional $500 a month that you can put toward your snowball.
Your debt is paid off in full in just one month because you are paying $550 per month for the medical bill (the $50 minimum payment plus the additional $500). You can now apply the $550 that was freed up to your credit card debt, making a total payment of $613 ($550 plus the $63 minimum payment). In about four months, you’ll be kissing that credit card debt goodbye.
Next, you’ll take a $748 monthly hit to the face from that car loan ($613 plus $135). In less than nine months, you’ll be driving off into the sunset in a vehicle you actually own.
When your final (and largest) debt is reached, you’ve become serious and have made the decision to reduce your spending even further, which will give you an additional $100 per month. That means you can now pay $944 a month toward that dreaded student loan! Sallie Mae will be packing her bags in just nine months with such a large payment!
Now that you know why the debt snowball is the best debt payoff strategy available, you can pay off $20,000 in less than 24 months by paying off your debt in the correct order, adding extra money to your snowball, and maintaining focus on your objective. Additionally, it’s likely that you’ll become so motivated along the way that you’ll pay off your debt even quicker!
What About the Interest Rates?
The debt avalanche method, which involves paying off your debts in order of highest to lowest interest rate, may be familiar to you. But here’s the thing: It might take some time before you see any improvement if you begin paying off your debt with the highest interest rate first, which is typically also your largest balance.
Pretty soon, you’ll lose steam and maybe give up altogether. Why? Because it’s taking forever to gain traction! You’ve started with the hardest debt, instead of the easiest. Additionally, you’ll still be required to make payments on all of your other minor, bothersome debts.
However, eliminating the smallest debt first allows you to win much more quickly and permanently remove that debt from your life. The second debt will soon follow and then the next and the next. All of a sudden, rather than paying off your debts gradually with bite-sized minimum installments, you’re hurling a massive snowball of a payment at the last ones.
When you see your debt snowball actually working, you’re more likely to stick with it. And the next thing you know, you’ll be screaming, “I’m debt-free!”.
The 7 Baby Steps Explained – Dave Ramsey
FAQ
What are the basics of Dave Ramsey?
What is the Dave Ramsey method of paying off debt?
What are Dave Ramsey baby steps?
Remember, this is just the start. You’ll see in a couple of steps that the goal is to build up that emergency fund even more, but $1,000 is a great start. Probably the most famous step among the Dave Ramsey baby steps is the debt snowball method.
Who is Dave Ramsey?
Dave Ramsey is a personal finance personality who created a plan that is simple in nature and is effective at helping individuals and families eliminate debt. In his book, The Total Money Makeover, he lays out the Baby Steps, which are 7 steps to help and guide you through the process of eliminating debt and building wealth.
What is Dave Ramsey’s Baby Step 7?
Baby Step 7 – Build Wealth, Give and Live in Financial Peace! Now that you know what to expect from each aspect of this Dave Ramsey Financial Peace area, let’s go through what you should know about each Baby Step. The first step is to build a small emergency fund of $1,000.
What are Dave Ramsey’s 5th & 6th baby steps?
Dave Ramsey’s fifth and sixth baby steps involve a pair of financial targets that may or may not be right for you personally. His fifth baby step will see parents begin to save for their children’s college needs.