by Dave Ramsey
With a take-home pay of $3,350, could you invest $1,995 if you had no payments? All you have to pay for are utilities, food, clothes, insurance, and other miscellaneous expenses. That would be tight, but doable. If you do that for just fifteen years, you will have a pinnacle experience. I will explain that later.
Many of you reading this are convinced that you could become wealthy if you could get out of debt. The problem now is that you are feeling more and more trapped by the debt. I have great news! I have a foolproof, but very difficult, method for getting out of debt. Most people won’t do it because they are average, but not you. You have already figured out that if you will live like no one else, later you can live like no one else. You are sick and tired of being sick and tired, so you are willing to pay the price for greatness. This is the toughest of all the Baby Steps to your Total Money Makeover. It is so hard, but it is so worth it. This step requires the most effort, the most sacrifice, and is where all your broke friends and relatives will make fun of you (or join you). This step requires you to shave your head and drink the Kool-Aid. Just kidding, but not by much. Your focused intensity has to go off the scale. Remember the Albert Einstein quote from earlier in the book? “Great spirits have often encountered violent opposition from weak minds.”
If you really believe that wealth building will no longer be a dream but a reality if you have no payments, you should be willing to do bizarre and sacrificial things to have no payments. Time to pay off the DEBT!
Baby Step Two: Start the Debt Snowball
The way we pay off the debt is called the Debt Snowball. The Debt Snowball forms, as well as the budget forms, are in the back of the book (pages 219–220), and they are part of the Financial Peace budgeting software. The Debt Snowball process is simple to understand but will require truckloads of effort. Remember what my pastor said: “It isn’t complicated, but it is difficult.” We have discussed that personal finance is 80 percent behavior and 20 percent head knowledge. The Debt Snowball is designed the way it is because we are more concerned with modifying behavior than correct mathematics. (You’ll see what I mean shortly.) Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of those times.
The Debt Snowball method requires you to list all your debts in order of smallest payoff balance to largest. List all your debts except your home; we will get to it in another step. List all of your debts—even loans from Mom and Dad or medical debts that have zero interest. I don’t care if there is interest or not. I don’t care if some have 24 percent interest and others 4 percent. List the debts smallest to largest! If you were so fabulous with math, you wouldn’t have debt, so try this my way. The only time to pay off a larger debt sooner than a smaller one is some kind of big-time emergency such as owing the IRS and having them come after you, or in situations where there will be a foreclosure if you don’t pay it off. Otherwise, don’t argue about it; just list the debts smallest to largest.
The reason we list smallest to largest is to have some quick wins. This is the “behavior modification over math” part I referred to earlier. Face it, if you go on a diet and lose weight the first week, you will stay on that diet. If you go on a diet and gain weight or go six weeks with no visible progress, you will quit. When training salespeople, I try to get them a sale or two quickly because that fires them up. When you start the Debt Snowball and in the first few days pay off a couple of little debts, trust me, it lights your fire. I don’t care if you have a master’s degree in psychology; you need quick wins to get fired up. And getting fired up is super-important.
It’s funny to think that at first, I didn’t even realize we had a problem. But I started listening to Dave on the radio and read The Total Money Makeover, and I got scared. We realized that we were one accident or one job loss away from losing all we had. We simply made too much money to have six-figure debt, not including our home.
It all started after we graduated, loaded with $60,000 in student-loan debt; we did what was normal. We bought a house, two new cars, and took on an additional $35,000 in credit-card debt. We just didn’t bother—we weren’t trying to keep up with anyone or buy a lot of miscellaneous stuff over time—we just failed to care.
It was the budget that allowed us to communicate in ways we never had before. When we saw that we could clear up a lot of debt in a relatively short period of time instead of the ten to twenty years we originally thought it would take, a huge amount of stress was suddenly lifted off of Amanda.
The thirty-five months working on the Debt Snowball was the hardest part, but we never wavered. Yes, we had visits from Murphy—having a baby plus Amanda’s back surgery and other emergencies, to name a few—but we did it! We actually reached our goal of becoming DEBT-FREE!
We sold our brand-new Jeep Liberty (Amanda really loved that Jeep) and bought a gently used 1991 model. Amanda took on an extra shift at work, and I took over extra tasks around the house to compensate. We scaled back our lifestyle considerably and folks made fun of us, which told us we were on the right track. We knew that we couldn’t wander out of debt like we wandered into it.
Our entire paradigm shifted. For the six years we’ve been married, we’ve always had debt. We have yet to have a major argument over money since we started this plan. We know that we can do anything we want in a short time. We literally changed our family tree—all because we bothered and cared enough to do something about it.
Steven (age 32) and
Amanda (age 31) Farrar
eBay Store Owner; Pharmacist
One lady took her Debt Snowball form (page 220) to the local copy shop and had it enlarged to supersize. She then put her huge Debt Snowball on the refrigerator. Every time she paid off another debt, she drew a big red line through that debt, now gone forever. She told me that every time she walked through the kitchen and looked at that refrigerator door, she would yell, “Oh yeah, we are getting out of debt!” If that sounds corny to you, you are still not getting it. This lady has a PhD. She is not a dumb person. She is so sophisticated and intelligent that she got it. She understood that her Total Money Makeover was about a change in behavior, and that behavioral change is best enhanced by some quick (although small) wins.
When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathematically yet. You have, however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works.
After you list the debts smallest to largest, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra “found” money, is added to the next smallest debt. (Trust me, once you get going, you will find money.) Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it, plus any found money, on number three. When three is paid, you attack four, and so on. Keep paying minimums on all the debts except the smallest until it is paid. Every time you pay one off, the amount you pay on the next one down increases. All the money from old debts and all the money you can find anywhere goes on the smallest until it is gone. Attack! Every time the Snowball rolls over, it picks up more snow and gets larger, and by the time you get to the bottom, you have an avalanche.
Most people get to the bottom of the list and find that now they can pay well over $1,000 per month on a car loan or a student loan. At that point, it won’t take long to bust out and be debt-free except for the house. That is Baby Step Two: Use the Debt Snowball to become debt-free except for your home.
My wife and I were under twenty-five and had over $169,000 in debt. We were sick and tired of being sick and tired! Our debt had grown little by little. Amy would buy small things like clothes and
stuff for the house that seemed to nickel and dime us to death. I, on the other hand, would blow money on a larger scale. For example, I bought a BMW (for Amy, of course) and took her on a surprise vacation to New York City. We did not yet have the discipline to tell that inner child to shut up long enough for us to think before we made a purchase.
We did not have the urgency to get rid of our huge amount of debt until a turn in events changed our mind-set. Several years ago I changed jobs, which required a training period that decreased my monthly income by $4,000. We had some money in savings, but it quickly dwindled. To start our Total Money Makeover, we decided we had to lower our overhead, sell everything but the kids (maybe), and change our spending habits.
We got crazy and sold our rental property, and we paid off the BMW, department-store card, medical bills, and student loan. We were invited to do fun stuff, and to spend money doing it, but we held off. We decided to have a garage sale that ended up looking like an estate sale; we ate “creative” meals; and then I committed what some people would consider the ultimate sin: I sold my wife’s BMW. We knew if our family of four could just make it through these six months living on only $1,700 a month, we could ultimately change our family tree. And we did it! We became debt-free except for the house and were named one of The Total Money Makeover finalists!
The most important part of this whole process was learning to delay pleasure. It’s like Dave says: “Live like no one else, so later you can live like no one else!”
Josh (age 26) and
Amy (age 25) Hopkins
Mortgage Loan Officer; Stay-at-
Home Mom
The Elements of Making It Work
When I first started teaching this more than twenty-five years ago, I didn’t understand what all the elements of success were or all the clarifications that would be needed. The major elements of making the Debt Snowball work are using a budget, getting current before you start, smallest-to-largest payoff (no cheating), sacrifice, and focused intensity. Total, sold-out, focused intensity is possibly the most important. This means saying to yourself (and meaning it), To the exclusion of virtually everything else, I’m getting out of debt! If you take an old-fashioned magnifying glass outside and set it near some crumpled newspapers, nothing will happen. If you point the sun’s rays through the magnifying glass but move it around or wiggle it, nothing will happen. If you hold really still and focus the sun’s rays totally on that crumpled newspaper, things begin to happen. Focused intensity will cause you to smell something burning, and soon you will see an actual fire.
If you think this Debt Snowball stuff is cute and you might sort of give it a try, it won’t work. Total, sold-out, focused intensity is required to win. Aiming at the goal and nothing else is the only way to win. You have to know where you are going, and by definition know where you aren’t going, or you will never get there. I fly a lot, and I never get on a plane and think to myself, I wonder where this plane is heading? I know where I want to go, and if I’m heading to New York, I stay off the plane heading to Detroit. When I get off the plane, I don’t catch the first cab I see and say, “Why don’t we just drive around awhile because I don’t have a plan.” I tell them the hotel and street where I want to go. I then ask how long that will take and what the fare will be. My point is that we don’t wander aimlessly around in any other parts of our lives, but we seem to think that will work with money. You can’t get ready, fire, and then aim with money, and you can’t try to do six things at the same time. You are trying to get out of debt. Period. You will have to focus with great intensity to do it.
Proverbs 6:1 and 5 (loosely Dave-paraphrased) says, “If you have signed surety, my son, [surety is Bible talk for debt] . . . deliver yourself like the bird from the hand of the fowler and the gazelle from the hand of the hunter.” I remember reading that Bible verse in my daily Bible study one day and thinking what a cute little animal metaphor it was for getting out of debt. Then one day later that week I was surfing channels and hit the Discovery Channel. I noticed they were filming gazelles. The gazelles were peacefully gazelling around. Of course, you know the Discovery Channel wasn’t there just for the gazelles. The next camera shot was of Mr. Cheetah sneaking up in the bushes looking for lunch in all the right places. Suddenly, one of the gazelles got a whiff of Mr. Cheetah and became very aware of his plan. The other gazelles noticed the alarm and soon also were on edge. They couldn’t yet see the cheetah, so out of fear of running at him, they froze until he played his cards.
Realizing he had been discovered, Mr. Cheetah decided to give it his best shot and leaped from the bushes. The gazelles all yelled, “Cheetah!” Well, not really, but they did run like crazy in fourteen different directions. The Discovery Channel that day reminded viewers that the cheetah is the fastest mammal on dry land; he can go from zero to forty-five miles per hour in four leaps. The show also proved that because the gazelle will outmaneuver the cheetah instead of outrunning him, the cheetah will tire quickly. As a matter of fact, the cheetah only gets his gazelle burger for lunch in one out of nineteen chases. The gazelle’s primary hunter is the fastest mammal on dry ground, yet the gazelle wins almost every time. Likewise, the way out of debt is to outmaneuver the enemy and run for your life.
Around our office, the counselors can predict who will make it out of debt based on how “gazelle-intense” they are. If they are looking at a red line on the refrigerator door and yelling, they have a really good shot. However, if they are looking for a get-rich-quick scheme or some intellectual theory instead of sacrifice, hard work, and total focus, we give them a really low gazelle rating and a low probability of becoming debt-free.
I was first introduced to Dave through his radio show The Dave Ramsey Show. I was hooked right away. I was really inspired to read The Total Money Makeover and signed myself up to be a facilitator of Dave’s Financial Peace University at my church. His principles just make sense. They are so simple and very relevant to everyone. I simply needed to wake up and start paying more attention to my spending habits. It was all up to me.
Immediately after beginning his plan and creating a budget, I realized how stupid I had been. I spent too much of my life wasting so much money! With a cash-flow plan in place, I felt more in control. I was telling my money where it should go instead of wondering where it went. It was a very freeing experience.
Once I made the decision to change my mind-set and start living more responsibly, I was ready to embrace the Seven Baby Steps. My first inclination was to save money first, invest in retirement, and then pay off my debt. I was so wrong. If I had done it my way, I would still be struggling. I would still be a slave to my lenders.
Starting the Debt Snowball really got me fired up. It was amazing to see my debt gradually become smaller and smaller while my Snowball became larger and larger. I was so proud of my progress that became more and more evident with every month. Just to be able to make small accomplishments made a tremendous amount of difference. It continuously gave me hope throughout this process. Granted, I did not have or earn a lot of money to put toward becoming debt-free. But I think that made it all the more incredible. I knew I just had to make it work. The ability to become debt-free isn’t contingent upon a certain income. It is all about changing behavior and being intense about getting rid of that nasty debt!
Years ago I was simply ignorant when it came to debt. My family didn’t talk about that stuff. I just thought debt was something everyone had. Thank God I now know differently and can start living the life I deserve!
DeLisa Dangerfield (age 42)
Registered Nurse
An obvious step to working the Debt Snowball is to stop borrowing. Otherwise, you will just be changing the names of the creditors on your debt list. So you must draw a line in the sand and say, “I will never borrow again.” As soon as you make that statement, there will be a test. Trust me. Your transmission will go out. Your kid will need braces. It is almost as if God wants to see if you are really gazelle-intense. At this poin
t, you are ready for a plastectomy—plastic surgery to cut up your credit cards. I’m often asked, “Dave, should I cut my cards up now or when I pay them off?” Cut them up NOW. A permanent change in your view of debt is your only chance. No matter what happens, you have to pursue the opportunity or solve the challenge without debt. It has to stop. If you think you can get out of debt without huge resolve to stop borrowing, you are wrong. You can’t get out of a hole by digging out the bottom.
How to Get the Snowball Rolling
Sometimes your Debt Snowball won’t roll. When some people do their budget, there is barely enough to make all the minimum payments and nothing extra to pay on the smallest. There is no push to get the Snowball rolling. Let me offer another image to help you better understand this problem and the solution. My great-great-grandfather ran a timber operation in the hills of Kentucky and West Virginia. In that bygone era, after cutting the timber, they would put the logs into the river to float them downstream to the sawmill. The logs would build up at a bend in the river, and a traffic jam of wood occurred. This would continue as long as the jammed-up area stopped the progress of the other logs. Sometimes the loggers could break the jam loose by pushing the logs. Other times they would have to get radical before a real mess occurred.
