Dave Ramsey’s No-Nonsense Guide to Getting Out of Debt

A Dave Ramsey Guide to Getting Out of Debt

Getting out of debt is not about finding a trick or some special way to do it. Getting out of debt is about having a plan and sticking to it with all your might. Dave Ramsey’s plan to get out of debt is built on that idea. His plan is divided into several steps. According to the official Dave Ramsey website, the Baby Steps page lists Step 1 as saving $1,000 as a beginner emergency savings plan, and Step 2 is to “pay off all debt (except the house) using the debt snowball.” Dave Ramsey is all about getting out of debt. His official website says, “We don’t believe in managing debt, we get rid of it.” This is the whole philosophy behind Dave Ramsey’s debt reduction plan. The point is not to get comfortable with debt. The point is to get out of debt.

The very first step in Dave Ramsey’s debt reduction plan is to save enough money to build a very small emergency savings plan before beginning debt reduction. This is not meant to save you from every problem in the world. It is meant to keep you from getting further into debt by using your credit card to cover emergencies. Dave Ramsey says that having the $1,000 savings plan “sets you up to begin paying off your debt” and keeps you from getting further into debt.

After that, Ramsey’s main tool is the debt snowball. According to Ramsey’s official website, he recommends that people start by making a list of their debts, sorted by balance from smallest to largest, without any regard for interest rates. Then people make minimum payments on all of their debts except for the one they want to pay off first. They throw as many extra payments as they can at that debt. Once they have paid it off, they take the payment they were making on the first debt and add it to the payment for the second debt. They repeat this process until all of their debts are paid off.

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Ramsey is very explicit about the exact steps people need to take. According to his official website, people should “list your debts from smallest to largest,” make minimum payments on all of their debts except for the one they want to pay off first, “throw as much extra money as you can on your smallest debt,” and then repeat this process for each of their debts. This is the debt snowball explained in plain English.

One of the main reasons Ramsey prefers this debt reduction method over the mathematically optimal debt avalanche is behavioral. He thinks that people’s success in personal finance is driven more by behavior than by math ability. According to Ramsey, “personal finance is 80% behavior and only 20% head knowledge.” This is the heart of the Ramsey method. He thinks that people do not fail financially because they are bad at math. They fail because they cannot keep going. The debt snowball works, according to Ramsey, because it helps people believe in themselves. When people see a debt balance disappear, they start to believe they can actually do it. This is important because it takes months, not days, to pay off debt.

Ramsey also encourages people to get intense. According to his official site, this is called “gazelle intensity.” This is the intensity and sense of urgency you want to have when it comes to paying off debt. It is compared to a gazelle running away from a predator. This means that paying off debt is not something to be taken lightly. According to his site, his advice is to take debt seriously and run away from it with intensity.

When it comes to this, it means cutting back on lifestyle expenses, selling things that you do not need, stopping extra investments for a season, and finding extra money in the budget to throw at debt. According to his Baby Steps page, it is necessary to get intense about paying off debt and it even says that “buy now, pay later” is a scam and keeps you broke. The system is designed to get rid of obstacles to success.

Budgeting is another part of the Ramsey plan. The debt payoff guide also talks about budgeting and how it is tied to the snowball method because it will not work if you do not have extra money in the budget. According to his site, his budgeting app will help you find extra money in the budget, and this is what gets the snowball going faster. The idea is that debt payoff is not something that happens accidentally. It happens because you make every dollar have a job.

Ramsey’s sequence is also important. He does not tell people to build up a large emergency reserve before attacking debt. His Baby Steps page indicates that Step 3 comes after Step 2 and requires that you have “3–6 months of expenses in a fully funded emergency fund.” The idea is that a small emergency reserve is enough to protect you from falling into debt, but debt payoff should remain your primary focus.

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A final piece of the puzzle is that Ramsey’s Step 2 does not include the mortgage. His debt reduction plan is to pay off all debt except the house. Only after all other debt is gone, the emergency fund is fully funded, and retirement savings are again in good order does the plan turn to the mortgage and the payoff of the house in Step 6.

What does it really mean to get out of debt according to Dave Ramsey? It means that you save $1,000, list your debts from the smallest to the largest, pay the minimum on all debts except the one with the smallest balance, and concentrate on that debt until it is gone, rolling the money from the debt that just got paid off into the next debt until all debts are gone. Then it means that you save enough money in an emergency reserve to keep from getting into debt again. This is the Ramsey roadmap in a nutshell.

The beauty of Ramsey’s approach is that it is simple to understand and hard to misunderstand. It is not fancy. It is not an approach designed for optimization nerds. It is an approach designed for action. According to Ramsey’s official website, “The Baby Steps will show you how to save for emergencies, pay off all your debt for good, and build wealth.” Whether or not you agree with every element of Ramsey’s philosophy, this is what Dave Ramsey himself teaches on how to get out of debt.