A reader recently wrote in with the following question:
How do you feel about Dave Ramsey’s program? I am in horrible debt and want to become debt free in the next 4 years.
That’s not a lot of information to go on, but here’s my response…
Dave offers some pretty sound advice in the form of his so-called “Baby Steps“:
Step 1: Save up $1, 000 to start an â€œEmergency Fundâ€
Step 2: Pay off all debt (except the house) using the â€œDebt Snowballâ€ (smallest to largest)
Step 3: Save up three to six months of expenses in savings
Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement accounts
Step 5: Save up college funding for your children
Step 6: Pay off your home early
Step 7: Build wealth and give! Invest in mutual funds and real estate
My biggest (and really only) criticism of Ramsey’s approach to debt reduction has been that his Debt Snowball doesn’t make good mathematical sense — the better approach (from a purely mathematical standpoint) would be to pay down the highest interest debts first rather than focusing on the smallest debts first.
This being said, killing off small debts first give you an early taste of success and keeps you hungry. If you need this sort of psychological boost to stay the course, it’s probably better to take Ramsey’s more conservative approach.
In the final analysis, there really isn’t a wrong way to pay off debt. The most important thing is to simply get started.
This article is part of my Money Q&A Series.