Get Out of Debt with Dave Ramsey’s Debt Snowball Method

They say that in this life, there are things you can’t possibly avoid: death and taxes. In times like these, I think it’s about time that debt is included as the third unavoidable.

Whether you’re indebted to your next door neighbor or buried in credit card payable, there’s no way you can get out of debt – unless you pay it.

Try searching the Internet and you’re going to find countless ways on how to get out of debt. Of all these ways, why do I think Dave Ramsey’s Debt Snowball Method is worth mentioning?

Getting to Know Dave Ramsey

Allow me to introduce Dave Ramsey. For many years, Dave has been an expert in giving personal finance advice. As a matter of fact, he has been prominently featured in various finance blogs and websites – most of which had generally positive praises for the generally effective debt reduction method.

His radio show is syndicated across the country. To date, there are around 400 radio stations airing his shows, with an average viewership of around 4 million. You can even tune to the station radio show yourself.

The archives of his radio shows are stored in his blog, which you can access for free here. Almost three years ago, in 2007, he also launched his television show on the Fox Business Network: The Dave Ramsey Show.

He is also the writer of the following bestselling books: The Total Money Makeover, Finance Peace, and More Than Enough. The most popular yet, The Total Money Makeover, contains 17 years of what Dave Ramsey’s knowledge and experience in personal money management (It also contains true stories of people who have been successful by following the principles of Dave).

Dave Ramsey is also the founder of the Financial Peace University.  Enrollment in this workshop will guarantee participants thirteen courses’ worth of financial instruction on how to get out of debt, invest money strategically, and calculate one’s own credit score. This program is usually opened to churches and nonprofit organizations.

The Debt Snowball Method in 5 Steps

The debt snowball method follows a simple rule that is based on, as Dave himself pointed out, 80% behavior and 20% head knowledge. So how exactly do you start?

Dave Ramsey’s Debt Snowball Method

1. Before anything else, accumulate an emergency fund

While a lot of tweaked versions of the snowball method will leave this point behind,  I strongly advise against it.

As you go through debt payment, you’re going to encounter a lot of unexpected problems. And by “unexpected problems”, I don’t mean buying a new product to pay off!

2. Make a list of all your debts from the smallest to the largest balance

Regardless of the interest rates of your current debts, list them all from smallest to largest. You will want to do this in a spreadsheet like Google Docs.

Or, you can use this free spreadsheet.

3. List the corresponding minimum payments for each debt

Now, this is where you start paying off your debts. Create a detailed list of the minimum monthly payment of each debt in the spreadsheet.

4. Pay the minimum balance for each debt regardless of the interest rate, except the smallest balance

Make sure that you allocate money into paying the minimum balance of each debt.

This is not how you’ll pay the each debt in its entirety once and for all, but it’s definitely a good start. In any case, don’t do the same for the debt with the smallest balance.

5. Throw in all your extra money to pay off the smallest balance

The reason why you’re excluding the rule for the smallest balance is that you will want to pay it all off.

You do this by directing every extra dollar you have to the smallest balance until it is finally covered (See on the left an illustration from www.moolanomy.com).

Proceed with Paying Off the Next Smallest Balance

With one debt off your list, you can proceed with the payment of the next smallest balance. Just keep on repeating this process, all while you are paying the minimum balance for each debt, until you finally get out of debt.

Dave Ramsey’s technique is to pay the small debts first before attacking the big ones. This may be counter-intuitive to how you think you should pay your debts, but there’s a clear advantage to this: you build a momentum that will snowball your way out of debt by eliminating your debts one after the other.

Since you’ll be paying off small debts first, you can easily see your progress. This progress alone will motivate you even more to get out of debt. Isn’t it motivating to see your debts disappear one by one?

What the Critics Are Saying…

Any reliable method can only be really reliable if it is able to stand the criticisms of skeptics. Many of its critics see this method as an impractical way for you to get out of debt.

That’s fairly understandable, since you are going to be insensitive to the interest rates of each debt. However, studies have shown that people who try to attack the big debts first end up incurring more debts in smaller increments.