Dave Ramsey UnofficialFan Site

by pagecarpenter

Article by Jeffrey Coleman

Paying Off Your Smaller Debts 1stA review of Dave Ramsey’s Method of Paying off DebitIncludes a simple illustration

Brilliant methodology. Paying off the smaller debts 1st makes people FEEL successful. This methodology considers how people FEEL, realizing that success just won’t happen.

Oh so true. Most people fear change so much they rarely get started. Having a really short term reachable, easy goal, can motivate the behavior of so many people.

Concentrate your efforts on paying off your smallest debit 1st. Pay just the minimum on ALL your other higher balances. Otherwise you will dilute your efforts and accomplish nothing. Later, and once you’ve paid off your smallest debit, focus on the next smallest debit by redirecting the amount you were paying on the smallest debit to the next smallest debit adding to the minimum you were paying (called compounding).

Example (illustrations only):

Pay 1st $ 2500 Master Card 15% interest $ 75 minimum payment

Pay 2nd $ 5000 Visa Card 17% interest $ 150 minimum payment

Pay 3rd $ 7500 Discover Card 29% interest $ 225 minimum payment

Typically people will try and pay off all three of the above simultaneously by adding some small amount to the minimums of each debit. Maybe adding $ 30 or so to each minimum. Instead, it is suggested that people take ALL of what they were paying above the minimums and add ALL that money to just the smallest debit. In this example, you should add $ 90 to the $ 75 minimum payment listed 1st for a total monthly payment of $ 165.

Example (illustrations only):

Pay 1st $ 2500 Master Card 15% interest $ 165 focused payment

Then once you’ve paid off the fist card listed, redirect all your efforts to the second smallest debit:

Pay 2nd $ 5000 Visa Card 17% interest $ 315 redirected focused payment

And so on:

Pay 3rd $ 7500 Discover Card 29 % interest $ 540 redirected focused payment

“You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt,” says Dave Ramsey.

According to Dave Ramsey’s snowball plan, the principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, he says, “nothing gets accomplished because all your effort is diluted.” First accumulate $ 1,000 cash as an emergency fund. Then begin intensely getting rid of all debt (except the house) using Dave Ramsey’s debt snowball plan. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.

Previously I was taught that you should list the highest interest 1st., regardless of the balance due. Pay that one first. Then move on to the next highest interest debit. The rest of those plans are identical to Ramsey’s plan.

Blake Thompson (Senior Producer of The Dave Ramsey Show) speaking to teenage leaders from around the country on “Career Exploration Day” about his position, his team and some behind the scenes history of the show, etc.