Dave Ramsey’s Baby Step 2: Using the Debt Snowball Method

Man holding a snowball representing Baby Step 2

What is Baby Step 2 in Financial Peace University?

Dave Ramsey’s Financial Peace University is a 9-week personal finance program, usually taught in small groups and often offered in churches around the country. The course is designed to help its students get on a budget, pay off debt, and create a financial plan for their future.

This personal finance course is broken down into “baby steps,” each of which should be completed before moving to the next.

Though the name implies that these steps are small, some of them may take months or even years to accomplish. But don’t let that deter you. The important thing is to take the first step, and then keep moving forward.

In this post, you’ll learn all about baby step 2, which is how to tackle your debt by making better money choices and using the debt snowball method.

What is the Debt Snowball method?

The debt snowball method is an effective approach to debt problems that focuses on paying off balances from smallest to largest regardless of interest rate.

Eliminating smaller balances first increases motivation and engagement with your debt payoff goals.

Paying off debt is the second baby step in the Financial Peace plan, (after baby step 1 is completed and there’s a starter emergency fund of $1,000 in the bank).

The debt snowball illustration below provides a visual example of paying off debt balances one by one, increasing payments as each balance is paid off.

Debt Snowball Illustration

Once the smallest debt is paid off, you would aggressively start paying off the second-smallest debt. This simple plan allows you to achieve zero balances quickly, which gives you the motivation to keep going until you’re tackling your biggest credit card debt.

When Dave Ramsey talks about debt in this step, he means all non-mortgage debt.

So, this would include: 

  • credit cards
  • auto loans
  • student loan debt
  • bank loans
  • personal loans
  • medical bills
  • payday loans
  • home equity loans

The Debt Snowball method uses momentum and motivation to work successfully. Both are created by paying off your debts from the smallest to the largest balance.

Here are the Debt Snowball rules to follow when using this debt payoff method:

  1. List all of your debt balances (except mortgage) from smallest to largest.
  2. Make minimum payments on every debt, except the smallest balance.
  3. With gazelle intensity and focus, put every penny you can scrape up towards that smallest debt. (Examine your disposable income to find extra funds you can apply to your debts.)
  4. Once the smallest debt is paid off, apply those funds (along with the minimum payment you were already making) to the next smallest debt.
  5. Keep “snowballing” your payments until ALL of your non-mortgage debt is paid off!

Some people have a hard time with this because they’re so concerned about what they’re paying in interest.  It’s not logical to pay off a debt with 4.5% interest first and only make minimum payments on a credit card with a 15% rate.

But Dave reminds us that getting out of debt is not a mathematical problem – it’s a behavior problem.

You must find the motivation within you to change your relationship with money. 

When you experience some small successes in the beginning, you start to feel hopeful. You see progress, there is momentum, and you want to keep going. Because for once, you feel in control of your finances.

The Debt Snowball is all about changing your behavior through the power of hope.

Stop giving your wealth away

Dave Ramsey says that our largest wealth-building tool is NOT debt – it’s actually our basic household income.

Creditors like Visa and Sallie Mae get rich off of our payments. Their companies get bigger and buildings get taller, while those in debt remain stuck and unable to build wealth.

Can you imagine what life would be like if you didn’t have any payments? How much extra money you could invest in your retirement fund and kids’ college fund? Or if you only had to work when you want to, not when you need to?

Your entire life would be different.

We can talk ourselves into believing that the inconvenience of debt is minimal compared to the fulfillment we’ll feel from what we’re buying. This is a lie.

Dave Ramsey uses a large chain as a visual metaphor to describe debt. It entangles us and weighs us down, sometimes to the point where we can’t even move.

And, as long as we carry debt, we’ll be a slave to it.

The fastest way to increase your wealth is to take control of your income. Minimize expenses that don’t grow it, and maximize opportunities that multiply it.

In our culture and generation, this requires a shift in thinking. Credit card debt is about as American as apple pie, and Dave Ramsey claims it is the most marketed product out there.

We’ve been brainwashed into believing that debt is normal, acceptable, and even necessary.

In the course, Dave Ramsey breaks down the truth behind the myths about debt we’ve been led to believe. Some of these might blow your mind because it challenges a belief you’ve held for years. That’s why Dave backs up these truths with statistics that are hard to ignore.

I encourage you to read through these with an open mind, with the understanding that changing your mindset is a process and may take a considerable amount of time and effort.

Dave’s debt myths vs truths

Myth #1: Credit cards are necessary to rent a car and make purchases online.

Truth: A debit card works for both! And because it immediately takes the money out of your account, you’ll think twice about spending it.

Myth #2: You’ll always have a car payment, so get used to it.

Truth: These days, buying a used car isn’t as risky as it used to be. Because cars lose value so quickly, you can find a reliable vehicle that’s a fraction of what a new one costs. The best car to buy is the one you can pay cash for.

Myth #3: You need to have a credit card to increase your credit score.

Truth: Actually, this financial advice could be true – but it’s the wrong perspective. The FICO score is all about your relationship with debt. That high number we all want to attain is just a reflection of a high usage of debt over an extended period of time without any late payments. Is that something you want to be proud of?

Myth #4: I use my credit card to earn points, then I pay it off every month.

Truth: If this is you, that’s great! But the bad news is, even though you pay the balance every month and avoid interest, you are still probably spending more money when you charge. Research shows up to 83% more! Save your money and pay cash.

Myth #5: A credit card offers more security than a debit card.

Truth: Dave says that debit cards and credit cards have the same amount of protection. I did a little searching of my own and found some contradicting information, so I went straight to the source. Click here to see what Visa says about your debit card security. Basically, you’re covered for any fraudulent activity, so don’t be scared to use your debit card!

Myth #6: My college student needs a credit card to learn about financial responsibility.

Truth: Dave Ramsey says more students drop out of college because of financial trouble than academic failure. Yes, your child might learn responsibility by learning to pay back what’s been borrowed. But is it wise to borrow in the first place? There’s a difference between being financially responsible and financially savvy. Choose wisely.

Myth #7: Leasing a car is smart because of its value decline and tax advantages.

Truth: If you can work a calculator, you can figure out that a car lease is the more expensive way to finance a vehicle. A car lease keeps you in a perpetual car payment cycle, and ultimately you have nothing to show for it in the end. The smart way to pay for a vehicle is with cash and owning it outright!

Myth #8: I can get a good deal on a new car.

Truth: Dave claims that a new car will lose approximately 60% of its value in the first five years, and this article confirms that estimate. A “good deal” will never guarantee you such an enormous investment loss. Instead, buy a used car (with cash) after somebody else has paid for its depreciation. Now, that’s a good deal!

Myth #9: A home equity loan is a great choice to consolidate debt and use as an emergency savings fund.

Truth: Borrowing extra cash to pay back debt is never a good money choice. You’re still in debt, and your behavior hasn’t changed. Besides, if you use debt as an emergency savings fund, then you turn the emergency into a crisis that will haunt you for months, if not years. Always have cash ready by building up cash reserves in a dedicated emergency savings account.

Myth #10: Consolidating debt can save me in interest and give me a smaller payment.

Truth: Debt is debt is debt, no matter how you try to dress it up. Remember, it’s not a mathematical problem – it’s a behavior issue. There’s no sacrifice when switching from one debt to another, and actually, most people end up with more debt because they never addressed the root of the issue. You can’t borrow your way out of debt!

Myth #11: Being a co-signer for my friend or relative is safe for me and helpful for them.

Truth: The reason their loan requires a co-signer is because the bank doesn’t expect them to pay it back! You take the risk of hurting relationships, creating conflict and strife, and letting people down. And, even the Bible says that guaranteeing someone else’s loan is stupid. Yep, stupid.

Myth #12: You need student loans to go to college.

Truth: 68% of millionaires with a college degree NEVER took out student loans.  (I spent some time searching for another statistic that lined up with this number, but the percentage is pulled straight from Chris Hogan’s book, Everyday Millionaires.)  

Myth #13: (The biggest myth of all) Debt is a wealth-building tool that should be used to create prosperity.

Truth: “Debt is proof that the borrower is slave to the lender.”  Debt does not create financial freedom, but instead keeps you chained to building other people’s wealth with your own money.

An important thing to remember is that our culture has taught us the myths outlined above. Marketers, the media, and most people will disagree with the truths that Financial Peace University teaches. That’s because being in debt is normal.

But, once you’re purposeful about changing your actions, you can choose to challenge the status quo and educate yourself – not just accept what’s put in front of you.

It’s time to get mad! Like Dave Ramsey says, it’s time to run like the gazelle when it’s being chased by the hunter. Otherwise, debt – like a predator – will take you down.

What comes after Baby Step 2?

Once you build a starter emergency fund in baby step 1, and pay off your debt with the debt snowball method in baby step 2, you’ll move on to the following baby steps in the course:

  • Baby Step 3: Build a fully-funded emergency savings account to cover 3 to 6 months of expenses. Keep your savings in a high-yield account or money market to maximize returns.
  • Baby Step 4: Invest 15% to build income for retirement. As a reputable investment advisor, Dave Ramsey suggests putting your money into a 401(k) with an employer match, a traditional or Roth IRA, or growth stock mutual funds.
  • Baby Step 5:  Save for your kids’ higher education. Dave Ramsey’s investment advice is to invest in a 529 tax-advantaged savings plan for your children’s college education. 
  • Baby Step 6: Pay off your mortgage so you’ll have financial peace of mind when you retire.
  • Baby Step 7: Continue to build wealth, but also give away a bunch of money, once you achieve financial independence.

More tips on how to use baby step 2 to get out of debt

As a popular and successful financial expert, Dave Ramsey knows how to get out of debt for good. Most financial gurus will tell you to focus on the numbers, but Dave understands the power of mindset as well.

If you’re swamped in debt, you may feel a little hopeless. I encourage you to take Dave’s advice and use the strategy that will increase your motivation as well as decrease your debt load. 

Remember, the most powerful wealth-building tool is the income you already make. So, the goal is to stop giving it away to credit card companies.

Here are Dave Ramsey’s steps to tackle your avalanche of debt:

  1. Stop borrowing money and cut up your credit cards.
  2. Save up just enough to have a small emergency fund – $1,000.
  3. Then, STOP saving and attack your debt with every cent you can spare – stop contributing to the 401(k), get a side job, sell stuff around the house, even use ALL savings except your emergency fund and any retirement-related accounts.
  4. Use the Debt Snowball method to build momentum and motivation (steps listed at the top of this post).
  5. Pray – even if you don’t think anyone can hear you.  You might be surprised!

Dave Ramsey is famous for saying that personal finance is 80% behavior and 20% head knowledge.

I think what he’s really trying to say is that good financial management is more about what you do (or don’t do) than what you know.  This makes sense.

Here are some dos and don’ts from Dave:

  • Do things “at the speed of cash”
  • Don’t be normal – normal is what broke people do
  • Don’t follow everyone else’s scoreboard (the credit score)
  • Do follow your own scoreboard (your net worth)
  • Do something you’ve never done before, so you can get something you’ve never gotten before

Now is the time to act.  Are you mad, fed up, sick and tired?  Are you ready to change, to live like no one else, to push against the status quo?

I am, and I hope you join me in this battle against debt!

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I hope you’ve enjoyed reading

Dave Ramsey’s Baby Step 2: Get Out Of Debt For Good

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