Step 1 of the 7 Baby Steps in “Total Money Makeover” by Dave Ramsey talks about starting an emergency fund of $1,000. Today, we discuss Step 2 which is to start the debt snowball.
Debt is a good servant but dangerous master
Debt is one of the most damaging thing you can take on if you are not careful. Unsecured debt in the form of credit cards, car loans etc. especially when the money goes to pay for consumption is a drag on our ability to save and invest for your retirement, your children’s university and for financial independence. Dave Ramsey absolutely abhors debt as he’s gone from millionnaire to bankruptcy all before the age of 30. He has since got back out of bankruptcy but he warns people not to go through it as the record stays for 7-10 years and you will find it difficult to conduct financial activities if you have a bankruptcy record. Even in Singapore, you cannot be a director if you are an undischarged bankrupt and need the permission of the official assignee to travel out of the country.
What is the Debt Snowball
Conceptually it is straightforward.
List down ALL your credit card debts from the smallest amount to the largest. Start paying off the smallest to the biggest because of the quick win and psychological boost you get from clearing them first. You do this after making sure you take care of your (moderate) living expenses, credit card minimum payments etc. In order to arrive at step 2, you need to be making progress on step 1 which is to begin your emergency fund. For those who live hand-to-mouth, this can be a challenging thing to do.