My Debt Snowball

I’ve recently read a few books by Dave Ramsey – The Total Money Makeover and Financial Peace – both good reads.  It’s strange experience reading Mr. Ramsey because he really doesn’t saying anything profound but what he does say is based thoroughly in common sense and practicality.  In that respect, I really found his books useful – as a newbie to trying to get some control over my personal finances, a very simple common sense approach is exactly what I need.  Dave covers some great things that seem to be the foundation for getting your personal finances in shape – simple things like creating a monthly budget, not using credit cards and planning for future expenses. 

In his books, Dave recommends a series of 7 “Baby Steps” – I’m focusing on the first two. 

Baby Step 1 – Save $1,000 in an Emergency fund to cover the “what if’s” of life. 

I decided to part with a very dear possession – my tenor saxophone.  Yes, I’m an amateur musician and have been playing for my own personal enjoyment on and off for the last nearly 20 years.  But … the instrument and accessories should be able to get me over $2,000 on eBay … so that’s where they’re going. 

Hopefully within the next week or so I’ll have $1000 for my Emergency Fund and can apply the additional money to my Debt Snowball. 

But that’s where I take issue with Mr. Ramsey. 

Baby Step 2 – Pay off all debt with the Debt Snowball

Now certainly I don’t disagree with paying off debt – that’s why I started this silly little blog.  But I wonder about the method Dave recommends … specifically, paying of Debts from smallest to largest as opposed to working on those debts with the highest interest rate.  Dave’s argument is that it’s important to have little ‘WINS” along the way and that psychologically, it’s helpful if we have quick successes in our Debt Snowball effort. 

In my personal example, that would mean paying off a Medical Bill ($1700 and no interest) and a Student Loan ($2000) first.  Now I suppose that still makes sense based on the fact that my other debt is also a Student Loan (around $12000) and a Citibank card ($9500 balance but at a rate of 1.99% until 12/10).   But I wonder if this would still be the best route prior to some other recent financial moves I made: a month ago, I decided to sell my 401K , take the tax hit, and pay of a large Credit Card debt with a 9.99% interest. 

But if I hadn’t done that, wouldn’t it make more sense to pay off the higher interest rate debt first?  Especially since Dave spends so much time in his book talking about compounding interesting working for and against us?  I understand the appeal of short-term “WINS”, think the motivation they provide to continue with the 7 Steps makes sense, and am going to work the Debt Snowball from my smallest to largest personal debts as suggested. 

But I’m wondering what some of you smarter financial people out there might think?  Has anybody tried a different Debt Snowball approach? 

Nonetheless, goodbye saxophone and hello Emergency Fund and the start to my Debt Snowball.

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