Make no mistake, a lack of cash and heavy household debt payments go together as Halloween candy and stomach aches — if you have the first you’re going to get the second in painful fashion.
On the debt front, personal finance guru Dave Ramsey has a cure that’s going to take some commitment.
Related: Dave Ramsey admits to the financial mistake that once left him broke
“If you don’t want to be broke people anymore, then get out of the land of payments,” Ramsey said on his September 7 radio show. “If you don’t want to be broke people anymore, you sit down and say, “Hey, here’s what we make. Here’s the size of our mess. What are we going to do to address the mess faster?”
Ramsey also points out that just because you can afford the payment doesn’t mean you can afford the item.
“So when broke people say, ‘I can afford this’, here’s what they’re really saying,” he says. “I think I might be able to pay the payments. That’s what broke people mean when they say that.”
To get on the proper path to curb debt, especially multiple debts, start by paying off the smallest debt first.
“It’s all about momentum,” Ramsey says. “When you’re chipping away at debt the size of Mount Kilimanjaro, your momentum (and your motivation) can lose steam over time. You need some quick wins to keep you going.”
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That’s exactly what happens with the debt snowball method which Ramsey heartily recommends.
“The debt snowball method is a debt reduction strategy where you pay off the debt in order of the smallest debt to the largest, gaining momentum as you go,” Ramsey said. “When the smallest debt is paid in full, you roll the minimum payment you were making on that debt into the next-smallest debt payment.”
Here’s how the debt snowball method works, in four action steps.
Step 1: List your debts from smallest to largest regardless of interest rate.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
“This will help you build momentum and stay motivated as you collect small wins one by one,” Ramsey adds. “That’s why it's the fastest method out there.
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