One way to reach financial freedom is to completely pay off all debts, except the mortgage. Dave Ramsey’s strategy to accomplish this financial goal is detailed in his Baby Step 2: The Debt Snowball.
In the debt snowball method, Dave Ramsey advocates paying off the debts one by one starting from smallest to largest. His method ignores the debt’s interest rates, which bother many rational savers including me. But this method really works for the general public and here is why.
In Sun Tzu’s Art of War, when you are doing battle, seek a quick victory. A protracted battle will blunt weapons and dampen ardor. By tackling the smallest balance first, you can quickly eliminate that debt to claim a small victory. In turn, it motivates the general public to achieve the ultimate personal finance goal of paying off all debts.
According to the Art of War, if the troops laying siege to a walled city, their strength will be exhausted. If the army is exposed to a prolonged campaign, the nations resources will not suffice. By solely focus on very high-balance debts that have higher interest rates, those debts will take the general public a lot longer to pay them off. Life can throw a curve ball during this trying time to derail the general public’s plan of debt reduction.
When weapons are blunted, and ardor dampened, strength exhausted, and resources depleted, the neighboring rulers will take advantage of these complications. While trying to tackling the big debts with higher interest rates, the general public might miscalculate and run out of emergency funds. As a result, they will be tempted to open more credit lines and accumulate more consumer debts to deal with life crisis. The banks and credit card issuers will gladly take advantage of these missteps.
Clearly, Dave Ramsey’s debt snowball method is simple and practical for the general public. Once the debtors eliminate the smaller and easier debts, they feel a sense of accomplishment. That propels their motivation to pay off all debts.
Is There Other Method to Pay Off Debt?
As for others that have the stamina and discipline, focus on paying off debts with higher interest rates make perfect sense. That is the method that I use for years. I started chipping down the highest interest debt first while paying the monthly minimum payments to the lower interest debts. By using this method, I have eliminated my houses mortgage before other debts with lower interest rates. It only works if your eyes are always on the ultimate financial goal of eliminate all debts.
This debt avalanche method of paying off higher interest rate debts first is financially better for me and some other folks that stay the course. But for the general public, Dave Ramsey’s debt snowball method of tackling smaller debts first really works. After all there are more than one way to reach our financial goal of eliminating all debts, and either methods will help us reaching that goal.
So, what method do you use? Do you pay off your highest interest rate debt first or do you follow Dave Ramsey’s debt snowball method?