Do you like the Dave Ramsey Baby Steps or the Crown Money Map? Dave Ramsey created the Baby Steps and Crown Financial Ministries created the Money Map for prioritizing and setting financial goals.
If you’re just joining, this is article #2 in a series about The Baby Steps and Money Map. I invite you to follow along with me as I walk you through both approaches, discuss my observations, hopefully, stimulate your thinking and raise some questions. I’ll round out the series with some summary thoughts.
Baby Step 2 – Money Map Destination 2
What does the Baby Step say?
- Pay off all debt wtih the debt snowball.
What does the Money Map say?
- Pay off all credit cards and increase savings to one month’s living expenses.
Observations and Questions
- It’s obvious the Money Map takes a more conservative approach to emergency savings because it recommends saving up one month’s living expenses before paying off all debt. It advises to only pay off credit cards and then focus on building a bigger savings. Do you think this is a good approach? Dave Ramsey feels strongly about focussing all attention on debt, but others believe the emergency savings should be built up at the same time.
- The Money Map scripture in this phase is Proverbs 22:7: “The borrower is servant to the lender”
What are your thoughts on this phase?
Understanding what Dave means by the “Debt Snowball” is crucial. The term is used in the Baby Step you list, but it isn’t described.
The Debt Snowball consists of putting all of your debts in order from smallest to largest in terms of total balance, regardless of interest rate. Only if two balances are very similar – like within 2% or 3% of each other – should you pay attention to the rates, in which case you list the larger rate first.
Once you have them in order, you pay minimum balances on everything but the smallest, and toward that you throw as much money as possible. Once it has been knocked out, all the money freed up by the extinct payment goes toward the next one on the list, and so on (hence, the “snowball” effect).
The purpose of this method is to create small victories early on and thereby encourage you to stick to the process. It is designed for people who have really gotten intense (Dave calls it “gazelle intensity”) about paying off their debt and will scrimp and save to find every penny they can put toward that goal. This is also the reason respective interest rates are largely ignored: Dave believes that using this method you will pay off your debt so quickly that very little interest will accrue regardless of the rate.
My guess (I haven’t studied Crown’s method, so I stress that I am speculating here) is that Crown lists credit cards first because they typically have egregiously high interest rates and are the most likely type of debt to be abused. Also, statistically, people tend to carry lower balances on their credit cards than they do on, say, student or vehicle loans.