Dave Ramsey UK Baby Step 2
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Welcome to baby step 2! There’s a full guide to Dave Ramsey here, otherwise, let’s talk step 2!
Welcome to the Dave Ramsey UK baby step 2! Right….
So you’ve got all your bills up to date and you’ve managed to save your emergency fund, which means you’ve got £1000 cash sitting in an account, waiting to mop up any little emergencies that might be lurking round the corner. So what’s next? Arguably… the best part!
Dave Ramsey UK baby step 2 is all about clearing ALL your non mortgage debt. Dave says we have to also pay off our student loan debt. I did not. UK student loans are totally different to those in the US, and it is NOT always beneficial to pay them off. Martin Lewes of Money Saving Expert explains why in this article. It’s one of those things about Dave Ramsey that differs from country to country. In the US, I agree whole heartedly, but not in the UK.
How to get rid of all your non-mortgage debt
The Dave Ramsey baby step 2 way is the Debt Snowball. I used this method along with 5 million other people, and I can tell you, it works. You list all your debts from smallest to largest, then start by paying off the smallest. Once the smallest is paid off, your going to take that minimum payment and add it to the next smallest, and keep going until you’re debt free.
You know the way a snowball gains momentum as you roll it and gets bigger and bigger? That’s what’s going to happen to your minimum payment. It’s going to get bigger and bigger until you’re debt free.
Alongside adding all your minimums to the next payment, you’re going to double down on all your efforts to raise extra funds to throw at the debts. Sell everything you possibly can (obviously not heirlooms :). It’s super hard work. But you need to focus, and you need to not stop until you’re debt free. How long’s it going to take? How hard are you going to try to make extra money. That’s your answer. It’s up to you.
One thing I can tell you is that it’s going to take massively LESS time than if you paid the minimums. I can promise you it’s super motivating seeing the smaller debts go and then the larger ones pick up speed as you throw more and more money sat them.
People are going to tell you that you should pay the highest interest rate debt first because it’ll ‘save you money!’. Will it? Maybe, without seeing your exact debts it’s hard to say. Will you double down with the same motivation you do with a debt snowball? Huge amounts of research says that NO, you won’t.
What you ARE going to do is save HUGE amounts of interest anyway by getting rid of your debts super fast. Could you have saved a little bit more? It’s a moot point for me!
Dave points out, quite rightly, that we didn’t care about the interest rate when we took the loan out, so rather than starting now, just get the debt paid off.
Not being able to find an App that worked for our family and the way we wanted to do our debt snowball, we created an app and you can download it for free from the link below. It’s got all the features we wanted: a way to record your journey, real time balance updates, it lets you know how much you’ve already paid and how much you still have to go, and it’s also got a debt freedom calculator so you can get a rough idea of when you’re going to be debt free!
Why does the Debt Snowball method work so well?
One thing there has been, is loads of research into WHY the debt snowball works so well at clearing debt, even though many of the ‘experts’ tell us it’s the wrong way to do it (as if clearing bad debt could ever be wrong!).
The debt snowball approach to debt is about changing the very behaviors that got you into debt in the first place. By producing fast results, the program sees more people seeing it through to the end that any other debt repayment method.
Seeing the back of a debt is crazily satisfying. You’re making progress and the idea that you can really become debt free becomes a little more of a reality, whereas before it might have seemed an impossible dream.
Where once the idea of a second job might have filled you with all sorts of horror, you start to look forward to throwing more money at your debts and seeing them shrink. It’s the power of reinforcement at work. What you’re doing is working so you keep doing it, and suddenly a second job seems like an amazing idea :)
Imagine if you started with an £11,000 debt. You only have the minimum to pay so it’s going down slowly. You work some overtime and sell a few things, so you get rid of £200. You’ve hardly made a dent in it. Sell the old sofa and throw another £150 towards it. Feeling good? Probably not. You’ve still got a HUGE debt, you’re working overtime to clear it and it’s not going down.
Now imagine if your first debt was £550. You’ve got your minimum payment, plus the £200 form overtime and the £150 from the sofa. It’s month 1, maybe 2, and you’ve nearly smashed through your first debt! Your motivations going to be pushing you forwards. Soon, you’ll have an extra minimum payment to throw at debt 2.
We’re not the only ones shouting about the benefits of the debt snowball. Researchers call the debt snowball approach the most efficient and effective, because it works.