Dissecting Dave Ramsey’s “Total Money Makeover” - Start the Debt Snowball [Part 2 of 7]

Posted by panzer on July 9, 2008. Filed under [personal finance]
Tags: [7 baby steps, Dave Ramsey, financial freedom in Singapore, financial literacy in singapore, personal finance, personal finance in Singapore, Total Money Makeover]

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.

The snowball effect comes when you start paying off the smaller credit card balances, the freed interest and payments to those balances can be snowballed into paying off the larger balances and thus you build up momentum to clear your credit card and related debts over time. But Dave shares that it takes an average of 2-3 years of living frugally and gazelle intensity of focus on clearing off the debt to make it. It’s not easy and takes sacrifice and discipline to achieve it.

Panzer’s Take

I am fortunate enough to emerge from my full-time national service in the Singapore Armed Forces with a positive net worth as I saved some of my NS allowance by staying-in and eating the cookhouse food. My University education was funded by a local scholarship which mean that my tuition costs of about $10,000 for a 3 year degree program was not a burden to my parents and I even had an allowance of $4,200 a year ($350 a month) to live on.

I can see how overwhelming debt can be as a recent article posted in the main stream media shared how more 30 somethings were being made bankrupts for debt  of $10,000 or more. The increasing cost of college tuition and consumerist culture of Singapore has lured many young people to using debt to fund their lifestyle needs. Living within your means becomes less important to keeping up with the neighbours.

One of my ex-colleagues once used his credit cards to make payments for his MBA program that costs about $20,000+. It took him almost 18 months to clear the interest and principal and it was quite bewildering to me why someone who was financially trained would pay 24% on interest to fund his MBA which did not directly contribute to increased income at his work. That made me realise that not everyone saw debt the same way.

Related articles by Zemanta

• Dave Ramsey’s Total Money Makeover: Coming Soon!
• Living Within Our Means
• The New Austerity - What’s Next 2008 - TIME