Financial Peace Week 2: The Debt Snowball

Last week, I wrote about the first video in the FPU Flex course I did on my own a few months ago.

Week 1 was all about Baby Step 1:  Building a $1,000 emergency fund, and also how to set up a budget.

This week focuses on Baby Step 2:  Paying off debt with the Debt Snowball method.


The Debt Snowball

After Baby Step 1 is completed and there’s a starter emergency fund of $1,000 in the bank, the next step is to focus on paying off debt.

When Dave talks about debt in this step, he means all non-mortgage debt.  So, this would include:

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

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

  1. List all of your debt balances (except mortgage) from smallest to largest
  2. Make minimum payments on every debt, except the smallest
  3. With gazelle intensity and focus, put every penny you can scrape up towards that smallest debt
  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.


Debt Snowball


Stop Giving Your Wealth Away

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

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

Can you imagine what life would be like if you didn’t have any payments?  How much money you could invest in your children’s’ education and future retirement?  Or only working 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 going into debt for. This is a lie.

Dave 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.  That’s not an inconvenience, that’s bondage.  And as long as we carry debt, we’ll be a slave to it.

Related Post:  12 Tips For Financial Planning In Your 50s (It's Not Too Late!)

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

For most of the video, Dave 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.


Street sign of Truth and Myth


Dave’s 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:  I need to have a credit card to increase my credit score.

Truth:  Actually, this 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.  Here is 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.

Related Post:  Wealth Creation: 50 Steps Toward Retiring A Millionaire

Truth:  Dave 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 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 fund.

Truth:  Borrowing money to pay back debt is never a good choice.  You’re still in debt, and your behavior hasn’t changed.  Besides, if you use debt to cover an emergency, then you turn the emergency into a crisis that will haunt you for months, if not years.

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 cosigner for my friend or relative is safe for me and helpful for them 

Truth:  The reason their loan requires a cosigner 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, if you think the bible is a smart book, even it 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 new book, Everyday Millionaires.)  

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

Related Post:  Why It's Important to Check Your Credit Report

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 listed above.  Marketers, the media, and most people will disagree with the truths that Dave teaches.  That’s because being in debt is normal.

The older I get, the more I realize how much I’ve just accepted what I’ve been spoon-fed by our culture.  That’s my bad, and I can’t go back and change the choices I made in the past.

But I can be purposeful about changing my actions today and in the future.  I can choose to challenge the status quo and educate myself, not just accept what’s put in front of me.

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


How To Get Out Of Debt Using The Debt Snowball

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

Here are Dave’s steps to get out 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 401K, 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.  It would be hard to prove this as a fact, but 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 broke
  • 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!

Leave a Reply

Your email address will not be published. Required fields are marked *

17 − 5 =

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Amazon Associates Disclosure is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to