Why I Hate Dave Ramsey’s Debt Snowball Method
Dave Ramsey, a popular personal finance radio talk show host, has a method for reducing debt: the debt snowball. This simple strategy to get out of debt will aid in reducing your debt and making it manageable, but the system is more psychological than it is mathematical.
How the Debt Snowball Method Works
The debt snowball method is extremely simple. The method is nothing more than a simple trick. Start reducing debt by removing your smallest debts first, then apply the monthly payment that you were making on the tiny debt to your much larger debt loads. The idea is that you’ll create a snowball effect. After paying off a $100/month debt, you move that same $100 and put it on a $150 a month debt. It’s a great idea, that is, until you start doing the math.
Why the Debt Snowball Method isn’t the Best
The debt snowball method is stuck in mathematical fallacy. The idea is that by using the debt snowball method you’ll pay off your debt quicker than any other method. This, however, simply isn’t the case. Because the debt snowball method is based on monthly payments, rather than interest charged on each debt, you’ll likely end up paying more in interest than you would if you paid off your debt with the highest interest rate first.
The Real Debt Snowball Method…The Highest Interest First
Debtors looking to pay off their debts as quickly as possible shouldn’t employ the debt snowball method as Dave Ramsey suggests. Instead, the emphasis should be on the interest rates you’re paying. It simply makes no sense to pay off a $1000 debt with 8% interest rates if you have a $5000 debt with a 16% interest rate. In fact, you’d be best off to make the minimum payment on the 8% debt until the $5000 debt is entirely reduced.
The Only Reason You Should use the Debt Snowball Method
The only reason you should ever employ the debt snowball method as Dave Ramsey describes is if you need a little encouragement in paying down your debt. The debt snowball method has an excellent advantage in that is it psychologically soothing. To see debts disappear from 5-6 credit cards to 1-2 gives plenty of encouragement to keep going, but it isn’t the fastest route.
Use a Planner
After signing up with Mint.com to manage my personal finances I couldn’t make it more clear as to how important managing your finances really is. (And how easy it can be, too!) Mint.com is a great tool to use to manage your money, see where you’re spending the most, and be informed as payment due dates near. So, whether you opt to use Dave Ramsey’s Debt Snowball method, or you go on your own to pay off the highest interest rate first, a tool like this can save you thousands of dollars!
is it wrong to pay for the seinar on credit?
seminar?
You would have a point if people were primarily mathematically inclined, but they’re not. That’s why Dave’s method is the best. We’re psychological beings and we’re better motivated seeing any kind of tangible progress, which is the point of the Debt Snowball.
First of all the reasoning behind that is. That when you pay off the smallest debt first. It gives you motivation to continue with the program and pay off more. If you pay off the highest balance you often get frustrated and quit.
If we are basing this solely on math, you wouldn’t be in debt to begin with. IE an individual being negative every month, the outgoing cash is greater then the incoming cash. That is the mathematical fallacy. So since individuals in debt can be tied to psychological reasons (I want it and I want it now) and not mathematical reasons, the DR debt snowball works.
As you listen to the callers you quickly discern the majority are not financially savvy. Just listen to their questions! Should one run up huge balances on credit cards? Of course not! Should you pay them off as soon as possible? Absolutely! Should you then cancel them so your credit score runs down? Only a FOOL would do that and that’s exactly what their radio god is advocating. You do need a decent credit score for insurance purposes and there will come a time when you will need a credit card for bonafide emergency reasons, like a car rental. Of course the foul mouth radio god doesn’t need credit cards because much of the trailer park gang has made him a multi-millionaire by eating out of the palm of his hand! Here’s another ramsey stupid point: pay off your low interest rate mortgage as early as possible so the mortgage company can invest that money for THEM rather than YOU investing it for YOU! Again, the financially unsavvy think’s this is such a great, great manuver but anyone who knows money sees thru this ramsey BS. And oh yes, if he’s such a “great Christian”, he shouldn’t be embarrassing the Faith with his substitute “F” words and “GD” phrase! He didn’t do this years earlier but then again, “PRIDE COMES BEFORE A FALL”.
Dave never says that the snowball method is faster or that you’ll save money by doing it vs higher-interest first payments. I’ve never heard him say either of those things.
What he says is that psychologically the debt snowball is more motivating and therefore more people stick with it.
I tried both and found the snowball way better in terms of constant progress and it was well worth the little bit extra in interest it cost me.
If you are smart enough to figure out how to pay the higher interest debts off first then you are smart enough to not get into debt in the first place. Dave’s system works.
He constantly states his plan isn’t the quickest way to mathematically pay off debt, but it is the best way behaviorally. Paying something off, being able to cross it off a check list and move on, using that momentum to keep you focused toward your next goal is what makes his plan great. Being in debt is a behavior problem not a math problem. We all got out of 5th grade.
Your all wrong if you don’t believe in DR ways, he has helped millions with his methods so that’s enough for you to shut your mouth and quit acting like your smarter than him.