Dave Ramsey’s Baby Steps: Step 2 – Get Out of Debt

by Derek Clark

Cut up those credit cards right now. You have to. If you keep using them you won’t ever get out of debt. Baby Step 2 is to attack your debt with a vengeance and pay off everything except the mortgage. Dave says that it is easy to wander into debt, but you can’t just wander out of debt. You have to fight, claw, run, and get “gazelle intense” to get out of debt.

Debt Snowball

Dave Ramsey advocates using the debt snowball method of paying off debt. This is where you order your debts from smallest to largest and pay them off in order. An example order would look something like this:

Medical Bill: $375
Furniture: $750
Visa: $2300
Mastercard: $5000
Student Loans: $12000

The strategy with the debt snowball is to pay the minimum payment on everything except the smallest debt. Any excess money or “found money” goes towards paying off the smallest debt. When it is paid off you simply move on to the next debt on the list until it is all paid off.

Some people will argue that it makes more sense mathematically to pay off the highest interest loans first. The thing is, if we were doing what made the most sense mathematically, would we have all of this high interest debt?

The reason for doing it this way is purely psychological. Paying off a debt gives you a mental boost. You had a success. If you start with the largest debt it will take forever and you will get discouraged. Starting with the smallest has other advantages as well. When you pay it off it improves your monthly cash flow. Getting rid of another bill you have to pay is great, and having more money each month to pay the rest of the bills is also great.

If you have any stories of how you paid off your debt I’d love to hear about them in the comments.

Step 1: $1000 Emergency Fund
Step 2: Get out of Debt
Step 3: 3-6 Months Emergency Fund
Step 4: Start Saving 15% for Retirement
Step 5: Save for Kid’s College
Step 6: Pay off the Mortgage as Fast as You Can
Step 7: Give, Save, Spend!

{ 4 comments… read them below or add one }

youngandthrifty March 25, 2010 at 11:50 pm

I personally like my credit cards, but I do pay them off every month…Good idea though if i ever get into consumer debt (cross fingers not to).

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Derek Clark March 26, 2010 at 7:07 am

I’ve never actually even had a credit card, I use my debit card for everything. I’ve just seen too many people overspend with the credit cards just because they can.

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Arthur @ Financialbondage.org March 29, 2010 at 7:06 pm

I’ve been on step 2 for over 5 years. Looking forward to getting on step 3 someday. Debt is dumb.

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Derek Clark March 29, 2010 at 9:03 pm

Keep working it Arthur, you’ll get there. One step at a time is all that we can do.

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