Savanna Hoffman
Dave Ramsey is a money expert who has shared several approaches to paying off student loan debt. His methods, outlined in his book 'The Total Money Makeover', are designed to help people with families and low incomes get out of debt and build wealth. One of the key strategies is the 'debt snowball' method, which involves paying off debts from smallest to largest while making minimum payments on larger debts. Ramsey also suggests cutting back on non-essential spending and increasing income through side hustles or part-time jobs to accelerate debt repayment. His 'Baby Steps' program emphasizes becoming debt-free before investing and encourages individuals to take responsibility for their debt.
| Characteristics | Values |
|---|---|
| Focus | Paying off student loan debt |
| Recommended approach | Paying off all non-mortgage debt (including student loans) before investing |
| Priority | Paying off debt over investing |
| Recommended strategies | Paying more than the minimum amount due, cutting back on non-essential spending, increasing income, using the debt snowball method |
| Recommended reading | The Total Money Makeover, Financial Peace University |
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What You'll Learn
Pay off debts from smallest to largest
Dave Ramsey recommends paying off student loan debt as soon as possible. One of his seven baby steps to achieving this is the "debt snowball method", which involves paying off debts from smallest to largest.
The debt snowball method is a strategy where you pay off your smallest debts as quickly as possible, while making minimum payments on larger debts. Once the smallest debt is paid off, you take the money you were putting towards that payment and put it towards the next-smallest debt. This process continues until all debts are paid off.
The benefit of this method is that it provides quick wins that can be very motivating. The excitement of paying off a debt can encourage you to stick with the plan. This method is ideal for those who need to see progress quickly and work their way up. It can be a good way to improve your credit score, as paying down debts may help your score over time.
However, it is important to note that this method does not take into account interest rates, bankruptcy, or loan consolidation options. If you have a very high debt-to-income ratio, this plan might not work for you. Additionally, you may save money by focusing on paying off the loan with the highest interest rate first (known as the "avalanche method").
To implement the debt snowball method, it is recommended to first build an emergency fund to ensure you have a safety net in place. You should also stay up-to-date on all your current bills and track your spending to ensure you stick to your budget.
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Ignore interest rates
Dave Ramsey's advice for paying off student loan debt is to pay off all non-mortgage debt before investing, no matter your age, income, interest rate, or how long it takes.
Ramsey Solutions, the company founded by Dave Ramsey, recommends ignoring interest rates and paying off debts from smallest to largest. This is known as the "debt snowball" method. List all your debts, including credit card debt, car loans, and personal loans, from smallest to largest balance. Throw any extra money you can find towards paying off your smallest debt while still paying the minimum payments on your other debts. Once you've paid off your smallest debt, move to the second-smallest debt. Take everything you were putting towards the first one and add it to the minimum payment of the second one. The more you pay off, the more money you free up to put towards the next debt. The goal is to get rid of debt so fast that the interest rate doesn't matter.
Ramsey Solutions also recommends paying more than the minimum due each month. Making larger payments will help you pay down your debt faster than if you make small, minimum payments.
Additionally, Dave Ramsey suggests closely examining your spending habits and finding ways to cut back. This may include stopping subscriptions to streaming services, cooking meals at home instead of dining out, or moving in with a roommate. These sacrifices are intended to be temporary while you work to pay off your student debt.
If you're already living frugally, it may be necessary to increase your income by getting a part-time job or starting a side hustle.
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$7.88
Pay more than the minimum
Dave Ramsey recommends paying off student loan debt as soon as possible. One of the ways to do this is by paying more than the minimum amount due each month. The idea is to pay off your student loans quickly so that you can move on to achieving other financial goals.
Ramsey's strategy involves listing all your debts from the smallest to the largest balance. While paying the minimum amount on all other debts, you should put any extra money towards paying off the smallest debt first. Once the smallest debt is paid off, you take the money that was going towards it and add it to the minimum payment of the next debt. This method is called the "debt snowball". The more debt you pay off, the more money you will have to put towards the next debt. This method allows you to pay off your debt at a faster rate than if you were to continue making small, minimum payments.
To find extra money to put towards your debt, Ramsey suggests looking at your spending habits and identifying areas where you can cut back. This may include reducing non-essential spending, such as subscribing to streaming services or eating out, or increasing your income through a side hustle or part-time job.
It is important to note that this strategy may not work for everyone, especially those with a high debt-to-income ratio.
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Cut back on non-essential spending
Dave Ramsey, the money expert, radio personality and personal finance author, has shared a few ways to cut back on non-essential spending to pay off student loan debt.
Firstly, he suggests looking at your spending habits and determining which aspects of your lifestyle you can cut back on. This could include cancelling streaming services, cooking meals at home instead of eating out, or getting a roommate to share living expenses. These sacrifices are intended to be temporary while you work to pay off your student debt.
Ramsey also recommends tracking your spending to keep tabs on where your money is going. There are free personal finance apps and websites that can help with this, such as EveryDollar. By budgeting, you can find extra money each month to put towards your debt.
Another tip is to wait 24 hours before making a purchase. After this time has passed, you may forget about the item or realise you don't need it, thus reducing impulse spending.
Additionally, Ramsey suggests increasing your income through a side hustle or part-time job, asking for a raise, or upskilling to find a better-paying job.
Finally, Ramsey advises paying off your debts from the smallest balance to the largest using the debt snowball method. This involves making minimum payments on all debts except the smallest one, and putting every extra dollar towards that smallest debt. Once that debt is paid off, you move on to the next smallest debt, and so on.
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Focus on paying loans, not investing
Dave Ramsey's Baby Steps method recommends paying off all non-mortgage debt, including student loans, before investing. This approach prioritises becoming debt-free, even if it may not be the most financially optimal choice. Ramsey suggests making more than the minimum payment to clear student loan debt as quickly as possible. This involves closely examining spending habits and cutting back on non-essential expenses, such as streaming services or dining out. The extra money saved can then be allocated towards paying off student loans.
While investing offers higher return potentials, especially with benefits like employer-matched retirement contributions, paying off student loans sooner saves money on interest. Additionally, being debt-free can improve one's credit eligibility, making it easier to qualify for new credit or loans in the future. For individuals with high student loan payments, focusing on repayment can be a crucial step towards achieving other financial goals, such as homeownership.
Ramsey's method also suggests paying off debts from smallest to largest balances using the debt snowball strategy. This involves making minimum payments on all debts except the smallest one, with every extra dollar going towards clearing that smallest debt. Once the smallest debt is paid off, the minimum payment from that debt is added to the payment for the next smallest debt, and so on. This strategy aims to accelerate debt elimination, regardless of interest rates, bankruptcy, or loan consolidation options.
While some may argue that investing provides an opportunity for higher returns, the decision to focus on paying off loans first considers both logical and emotional factors. Some individuals may prioritise the psychological benefit of being debt-free over the potential returns from investing. Ultimately, the choice between repaying student loans and investing depends on various factors, including interest rates, risk tolerance, and financial goals.
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Frequently asked questions
Dave Ramsey suggests the seven baby steps method, which involves paying off all non-mortgage debt (including student loans) before investing, regardless of age, income, interest rate, or time taken to get out of debt. The first step is listing debts from smallest to largest balance and paying off the smallest debt while paying the minimum on the others. Once the smallest debt is paid off, that payment is added to the next debt's minimum payment, and so on.
Dave Ramsey recommends paying more than the monthly minimum, even if it's just $50. He also suggests cutting back on non-essential spending and increasing income through a side hustle or part-time job.
The debt snowball method involves listing debts from the smallest to the largest amount. The smallest debt is targeted first while paying the minimum on the others. Once the smallest debt is paid off, that payment is added to the next debt's minimum payment. This method helps pay off debts quickly.
