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My niece is just over a year old, and starting to take her first steps. A lot of wobbling, falling on her bottom, grabbing coffee tables for support, the usual. When she does walk on her own, it will be one tiny step followed by one tiny step. No running, skipping, or jumping. Why not? She’s a baby. She doesn’t know how to do that yet. It’s with this in mind that I introduce The Baby Steps, the 7 steps approach from Dave Ramsey that we used to pay off our debt: over $80,000. I list the 7 steps them below, and you can read about them here.

• Baby Step 1 –  Save $1,000 to start an Emergency Fund
• Baby Step 2 – Pay off all debt using the Debt Snowball
• Baby Step 3 – 3 to 6 months of expenses in savings
• Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
• Baby Step 5 – College funding for children
• Baby Step 6 – Pay off home early
• Baby Step 7 – Build wealth and give

Why Dave Ramsey?

For me, the driver behind committing to this approach, amidst the many debt payoff strategies out there, was the fact that so many of the finance bloggers I read had cited Dave as an authority. No other one name surfaced as often on the variety of pages I browsed. His stuff must be good, I thought. Plus, the idea of them being called baby steps had some appeal to me. To really commit to something like this, I had to admit I knew nothing about finances – after all, that’s how I got into this 80k mess. Adopting the humility to admit I needed baby-level help was important. I ended up buying his book, The Total Money Makeover, which of course details much further the steps, and provides worksheets. I will say that it’s not necessary to buy the book – you could just listen to his podcast and get the same information, plus all the entertainment from the callers. Here’s what the steps looked like in action as my wife and I used baby steps to pay off our debt.

Baby Step 1 – Only $1,000 between you and the abyss

Going down to only a $1,000 Emergency Fund in a checking account can be nerve-wracking. Only having $1,000 between you and a serious accident, serious illness, or other catastrophe, served to motivate us to get through the upcoming debt payoff step as quickly as we could. For those who start out with more than $1,000, like us, you start paying off debts with anything above $1,000. For those who don’t yet have the $1,000, saving up to that mark adds a cushion in your life that will prevent minor inconveniences (engine trouble, an unexpected plane ticket for a family emergency, etc) from completely derailing you. If something like that does come up, you use what you need from the Emergency Fund to cover it, pausing the debt payoff temporarily, until you replenish what you used, and resume. For us, at the start we had 23k in a regular bank savings account that we had earmarked for a house downpayment. So, following the plan, we promptly moved 22k of it to debt payoff, and we were on to step 2.

Baby Step 2 – The Debt Snowball

This is the longest step, the actual payoff. As for explaining how it works, I will tap into my Massachusetts cold north roots for a moment. What happens as a snowball rolls downhill? It starts small, and as it goes along it gathers more and more snow, and gets bigger. Applied to finances, it means:

• arrange your debts from smallest to largest, in terms of total amount owed (Loan Balance). Disregard monthly payment amount, disregard interest rate. For us, that lineup looked like the below image.
• Pay the minimum monthly payment on all the debts, except the smallest one. The smallest one gets “every dollar” available applied to it until it’s paid off. Knock it out, get fired up! It’s like swatting a fly, a mosquito, a little pesky drain on your monthly cash flow.
• Once the smallest is paid off, the money that was going towards it then goes to paying off the next smallest debt. That money moving from the first debt, plus the money you were already paying on the second debt (the minimum payment) has increased the size of your snowball, increased the amount you’re applying to that debt.

Thoughts on the Debt Snowball

The snowball method is effective because it offers some “quick wins”. Knocking out the small balances completely eliminates them and gives you a good feeling of progress – 8 total loans goes down to 7, 6, etc, quickly. See ya later Macy’s credit card! Those quick wins are critical because paying off the larger ones (I hate you Wells Fargo) drags out over months and years at times, depending on your situation. If you’re running the numbers on your end, the 22k we started with was enough to wipe out loans 1-5 immediately, and part of 6. What remained for us to pay off shrank from 80k to 58k as a result!

Should I Avalanche Though?

Another widely used way to pay off debt is called the Debt Avalanche. This approach pays off debts in the order of highest interest rate first, not lowest loan balance. Mathematically, paying off the largest interest rate debt first would minimize the total interest paid, right? Yes. Emphasis on mathematically, because if that high interest debt happens to be a large balance, momentum will generate slowly. If you get discouraged at the pace and abandon your efforts, you would have been better off doing the snowball. For my personality, the avalanche is probably the method I would normally gravitate to. Why did I do the snowball, then? Singular focus. If you’re following a plan, then follow that plan. Don’t do a version of that plan, do the plan. Again, humility, and baby steps.

We have more posts coming soon with the tips and strategies we used to pay ours off and get them out of our life. Let us know if you have questions in the comments below! (and yes we are accepting baby modeling offers for my niece!)