Dave Ramsey - Baby Step 2
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You’ve got your $1,000 saved after going through Baby Step 1. You’ve set it aside in a place where it’s not too easy to access. Now you are really ready to dig into what can be the longest and most painful, yet most satisfying, Baby Step. This step will force you to “live like no one else so that later you can live like no one else.” It’s called sacrifice.
Baby Step 2 – Pay off All Your Debts
To get started, write down a list of all of your debts except for your mortgage. Put them in order of smallest to largest because this is the order you are going to attack them with. I recommend putting this list where you have to look at it every day. When our list was longer, it hung on the refrigerator so it was always in front of our face!
Many people ask Dave, “Shouldn’t I pay off the high interest ones first?” This step is more psychological than mathematical. You need to feel what it’s like to pay off a debt. You need to feel what it’s like to close a credit card account. So no, don’t put them in order based on interest rate. Start with the smallest and work your way to the largest.
Now we’re getting into what’s called the debt snowball. The first step is to get the smallest debt paid off. Once you pay off the first debt, use all the money you were spending on that payment and apply it as additional payment to the second debt. Once you pay off the second debt, use the money from the first two debts and add it to the payment for the third debt. And so on. I can promise you the debt snowball works. You will be amazed at how fast the debts disappear.
We are currently toward the end of this step. Even though we’ve got money flying out the door to get rid of our debts, it feels GREAT. I love looking at my loan balance on line and seeing it drop like crazy.
Depending on how much debt you have, this step could take a few years. Do not get frustrated! A few years of focusing on your debt is so much better than having it hang over your head for 10-15 years.
The sacrifice is worth it. I’ve never heard of someone getting to the end of this step and say, “Wow, I really wish I wouldn’t have paid off all my debts. I felt much better about my financial situation when I was making all those payments each month.”
Good luck, friends!
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Another way to solve the traffic problems of this country is to pass a law that only paid-for cars be allowed to use the highways. Will Rogers
Doug wasn’t “down with Dave” on this step until we did FPU. Then he understood the reason for small debt first. And as we’ve seen those suckers fall we’ve done a little dance and celebrated every time. OK, I’ve done a little dance. BUt still, seeing them go just makes you hit the next one even harder!
Sure does…I have people (one was a corporate finance person) argue with me all the time about the interest thing and how it doesn’t make sense. She didn’t understand though….this is PERSONAL finance…we’re talking about personal victories which make you feel good, and you want that victory to come early so you get that feeling of accomplishment. She called it a “cookie”, I say early “atta-boys” keep your momentum going, keep you wanting to knock out more. If it took you 2 years to pay off your first debt, you’d probably give up within 6 months and go back to your old ways. Get fired up, get mad at that debt, attack it with focused intensity, and knock it out of your life! Ready…set…GO!!