Dave Ramsey Dumping Debt (Class 4b of 13)

Dave Ramsey promotes a method of debt reduction called the Debt Snowball. It is not the most financially efficient method available but Ramsey contends that for sound psychological reasons it is the method most likely to succeed. He points out that if you understood the numbers, you would not be overwhelmed with credit card debt. Getting out of debt is hard work. It requires what Christianpf.com (the pf stands for Personal Finance) calls, “Getting Mad, Zealous, and Passionate.” Dave Ramsey calls it Gazelle Intensity. He recommends selling so much of your stuff to raise money to pay off your debts the children will think they are next. He also recommends taking a temporary part time job “throwing pizzas or delivering papers” until your debt problem is under control. He even recommends holding off on contributions to your 401K fund until completing baby step 2, the debt snowball.

The method works as follows. First rack and stack your debts, excluding your mortgage. Paying off the mortgage early is baby step 6. Start with the smallest debt and end with the largest. Let’s make up some numbers. For the sake of simplicity we will not consider the effects of interest rates in this example.

$500 Owed to store for new TV
$1,000 Credit Card A
$5,000 Credit Card B
$6,000 Credit Card C
$12,000 Car Loan
$19,000 Home Equity Line of Credit (HELOC)

First, while making the minimum payments on all your debts, build a $1,000 emergency fund, baby step 1. Then, while only paying the minimum on every other debt, take all the extra money you can afford on a monthly basis and go after the smallest loan first, in this case the TV. Let’s say you can make minimum payments on everything else plus $250 dollars per month because you have taken that part time job throwing pizzas or delivering papers. In two months the TV is paid for. Tape the receipt for the final payment on your refrigerator and celebrate.

Next take the $250 and the $50 dollar minimum payment you were making on the TV and add it to the minimum payment on credit card A. In three more months Credit Card A is paid off. Tape another paid in full statement to the refrigerator, while screaming curses and threats at credit card B. (Just kidding--maybe.)

Then take the $300 plus the $25 minimum payment you are making to Credit Card B. In 15 months the final Credit Card B statement resides on the refrigerator.

Then take the $325 and add it to the $50 minimum required by Credit Card C. In 16 more months another one bites the dust.

It is called snowballing because as you pay off each debt you have more money available to pay off the next debt, like a snowball rolling down a hill. Ramsey believes that extricating oneself from debt is 80% an emotional problem and 20% a matter of knowledge. He believes in going after quick attainable goals to build a psychology of success and willingness to continue when the going gets tougher. Based on Dave Ramsey’s data, my example is rather pessimistic. 18-24 months is typically the time required to complete the debt snowball.

Dave Ramsey’s five Rules to “Juice” the Debt Snowball

1) Quit borrowing more money
2) You must save money
3) Prayer really works
4) Sell something
5) Take a part time job or work some overtime

There are snowball debt calculators that require Excel or an Open Office equivalent available on the web. I used a spread sheet to track my mortgage as I made extra payments to principal. It is reinforcing to watch the extra payments peel off the backside of the loan as you go after a reduction in principal. I expect these would aid in a debt payment plan using Dave Ramsey’s method.