Dave Ramsey’s Total Money Makeover: Baby Step Two

Dave Ramsey is best known for helping people get out of debt. That’s why of all the steps in his Total Money Makeover program, Baby Step Two – or paying off all debt except the mortgage – is the step most written about, blogged about, and talked about on Dave’s radio show.

In Baby Step Two, Ramsey advises people to pay off their debt using his Debt Snowball method. This involves:

1. Order all of your non-mortgage debts from smallest balance to largest, regardless of the interest rate, payment amount or other factors. (Mortgage debt is addressed in Baby Step Six.)
   
2. Pay minimum payments of everything except the first debt on the list.
3. Throw any amount of money you can find to the debt you are working on.
4.  As you pay off debts on the list, add the payment amount from that paid-off debt to the next debt on the list, so that the amount you’re paying to each debt begins to snowball.
5.  Repeat this process until you have all of your non-mortgage debt paid off.

Dave Ramsey is one of the few financial experts who instructs people to pay off debts according to balance, rather than according to interest rate. He takes a lot of heat for this stance from people who say that it is mathematically advantageous to pay off higher interest rates first. Ramsey’s reasoning for using the balance method is that it gives people a psychological advantage as they begin to see the number of their debts reduced quickly. He is fond of saying that finances are only 20% math and 80% psychology.

The reason you need every psychological advantage you can get is that paying off debt requires great focus. In Total Money Makeover terms, this is called ‘gazelle intensity.’ Basically you’ll be slashing your budget to next to nothing, in order to get out of debt FAST. Wherever you can cut – cable, restaurant bills, new clothes – it’s all fair game. Baby Step two is not something you want to drag out to the point where you become miserable. You want to go all out and get it out of the way as fast as you can.

It is not unusual for debt-free callers to The Dave Ramsey Show to report that they sold something – sometimes something as big as a car or house – in order to get out of debt. That’s not surprising as Ramsey has said on many occasions that the car or cars in the household are often the big problem when it comes to finances. But many others have sold lots of smaller things on eBay or at garage sales in order to reduce their debt loads.

Snowflake can actually be a verb. It's not a Dave Ramsey term, but it’s one that’s been adopted by some of his fans as a way of getting the debt snowball rolling. Snowflaking involves sending small amounts of money towards the debt you are working on at that time. No amount is too small and the snowflakes are sent multiple times each month, with the result being that they have added up to something significant at the end of the month.

Here are some ideas of places to find debt snowflakes:

• Rebates
• Coupon savings
• Refunds or reimbursements
• Selling stuff around the house
• Doing odd jobs
• Saving loose change

The list is endless and once you start looking for snowflakes you’re likely to find them everywhere. Sending them directly to your debt is part of staying “gazelle intense.”