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Understanding Dave Ramsey’s Debt Snowball Reduction Plan

Dave Ramsey's Debt SnowballDo you have credit card debt? You are not alone. In fact, the average American carries $7,404 in credit card debt according to the latest figures from a recent CreditKarma.com report. The next question of course becomes how do you reduce and eventually eliminate that credit card debt. There are two schools of thought to paying off your debt. If you have multiple cards with balances and studies show that Americans carry several cards with balances, many financial experts recommend paying off the credit card with the highest interest rate first and then moving on to the next highest credit card. Dave Ramsey has a slightly different method with his Debt Snowball plan. He recommends tackling your credit cards and other debt with the smallest balance first.

Why Start With The Credit Cards With The Smallest Balance First?

The financial habits that we have and our attitudes surrounding money are mainly mental. If you have five different credit cards for example, two with small balances and three with rather large balances, Dave Ramsey’s theory goes that you will receive a mental shot in the arm by quickly eliminating two of your credit cards leaving you only three to focus on. It is a mental victory that will propel you to continue attacking your debt with new vigor. While you would be eliminating the same amount of debt using either method, in this example you would eliminate 40% of your credit cards with balances that can be seen as a very easy win.

How Does Dave Ramsey’s Debt Snowball Plan Work?

With Dave Ramsey’s Debt Snowball plan, you pay off your smallest debt with all your disposable income after you have paid all of your necessary bills such as food, electric, and rent. In his plan, you continue to pay the minimum monthly payments on all of your debt except one, the smallest debt. The Debt Snowball starts by throwing every last penny you can spare at that smallest debt after you have squeezed all of the unnecessary expenses from your monthly written budget. As soon as you get that smallest debt paid off, then you attack the next smallest debt using the monthly minimum you were already paying on it and now the additional extra free money from the first debt you just paid off. As you keep paying off more debt and other credit cards, you continue to roll the minimum payments that you were making into the next largest debt and also still using all the available disposable income that you have left over after paying all your bills. The debt payments build like a snowball rolling down a hill getting larger and larger, hence the name. You keep repeating this cycle for all of your debts no matter what type of debt they are, except your mortgage, until you are completely debt free. Dave Ramsey’s complete financial plan, called The Total Money Makeover, saves a family’s mortgage as the last debt to be tackled after saving for retirement and college funds have started later in the complete plan.

There is a certain amount of satisfaction when you completely payoff a debt. Whether it is a MasterCard, home equity line of credit, car payment, or some other type of consumer debt, Dave Ramsey’s Debt Snowball method builds on your enthusiasm and helps you win the mental game of paying off debt. Whether you use Dave Ramsey’s plan or some other means, paying off your credit card debt is a worthy goal and can be accomplished with determination and hard work no matter how you attack the problem.

(photo credit: redjar)

Hank ColemanHank Coleman is a writer, entrepreneur, and professional in the government sector. He holds a Bachelor’s Degree in Business Administration, a Master’s in Finance, and is currently studying for his Certified Financial Planner (CFP) credentials. Be sure to follow him on Twitter @HankColeman.

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