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One day, I heard my roommate and her boyfriend talking about debt snowballing. I asked them to explain it to me and where they learned about it. She lent me the Total Money Makeover by Dave Ramsey. This book teaches people with families and low income how to pay off debt and start building wealth. At that point in my life, I was a recent college graduate paying off student loans with a part-time retail job. So I certainly fell into the debt and low-income categories.
In this book, Dave Ramsey explains the steps to get out of debt and build wealth. For the purpose of this blog post, I’ll outline these steps and explain the first three that are related to getting out of debt fast. But I highly recommend reading the book because the explanations and anecdotes will motivate you.
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Dave Ramsey’s Baby Steps
- $1,000 to start an emergency fund
- This emergency fund creates a cushion for you. This way, all of your efforts can be focused on paying off debt. If something unexpected happens, like a branch landing on your car, the expenses for this emergency can be taken out of your emergency fund instead of your income for the month.
- Pay off all debt using the debt snowball method
- Debt snowballing is when you list all of your debts from the smallest amount to largest amount. Then work to pay off the smallest debt while paying off the minimums of the larger debts. Once you’ve paid off the smallest debt, add what you used to pay off that loan to the minimum of the next loan. Keep doing this until all of your accounts have been paid off.
- Build your full emergency fund (3-6 months of expenses)
- After paying off your debt, use the amount you were paying to lessen your debt to start building your full emergency fund.
- Invest 15% of household income into Roth IRAs and pre-tax retirement
- College fund for the kids
- Pay the house
- Build wealth and give
Here’s what I learned about paying off student loans
1. Your savings account could be costing you money
Sounds a little counter-intuitive, right? Isn’t saving money supposed to be a good thing? It is! But, after reading The Total Money Makeover, I realized that the dividends I was getting from my savings account were less than the cost of my student loan interest rate. So, keeping that money in my savings account was literally costing me money! As a result, I put aside $1,000 from that savings account and put the rest toward my student loans.
Since I was anxious about only having $1,000 in my savings, I was desperate to pay off the rest of my loans quickly. I lived off of 50% of my paycheck and used the other 50% to pay off my student loans. With the debt-snowballing method, I was able to pay off the rest of my student loans within five months!
2. Pay yourself first
Your expenses should include things like savings, paying off debt, and investing. I never understood the phrase, “Pay yourself first” until I read Dave Ramsey’s book. I thought that the word “expenses” only referred to the costs of living -— rent/mortgage, car payments, and utilities. Then, only extra money (if you had any) went to savings, paying off debt, and investing.
Once I moved savings, paying off student loans, and investing in the expenses category, they became a priority. Here’s the fun part…I also added budget categories for date nights, me time, and time with friends.
3. Your income – expenses should = 0
Yes, you read that correctly. And when I first read that, I was completely thrown off too.
But here’s the thing. The idea is to make sure all of your income is categorized. And that any money that doesn’t belong to a category will most likely be spent on frivolous things. Don’t forget what we just discussed in the last section, paying yourself first!
I know that as a new graduate trying to find a job, it’s possible you might not have any income. I’ve been there. And that’s why I created this Productive Job-Hunting Game Plan — so you can quickly, easily, and confidently find that first job and start making payments on your student loans.
4. Paying off student loans (or any debt) isn’t the finish line
I don’t mean to discourage you! I just want to be upfront with you. Because when I first started this journey I thought, “I just need to pay off my loans. Then I’ll be done!” But I was wrong.
The truth is, there’s isn’t really a finish line. After getting out of debt, you’ll feel so free that you’ll want to make sure you don’t go back. So you’ll go on to step three, then four, then five, and so on. And even once you’ve finished step seven, you’ll still need to work on sticking to your budget. But don’t worry! It gets easier! 🙂
5. You don’t have to agree with EVERYTHING Dave Ramsey says is in the book
Although I do think it’s important to follow the baby steps, there are some supporting factors in the book that I don’t agree with. And that’s okay!
For example, I disagree with his opinions on credit card use. I love the benefits of using a credit card—cashback, points to redeem for prizes or cashback, special offers, no international currency exchange rates, etc. So I use a credit card to pay for my expenses. But I only buy what I can pay 100% off at the end of each month. More info on whether or not you should pay for expenses with credit or cash here.
If you are interested in purchasing Dave Ramsey’s The Total Money Makeover, you can do so here. Definitely, use this book as a jumping-off point then follow up with research so you can form your own opinions on how to use your money.
Thanks so much for reading this blog post! I hope it’s sparked some motivation in you. If you have any questions or advice for others paying off their student loans, please comment below so we can pass on the knowledge.