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Dave Ramsey is Bad at Math

Written by Nickel - 692 Comments

See also: Dave Ramsey is Good at Psychology

If you’re familiar with Dave Ramsey, then you’ve no doubt heard of his ’snowball’ approach to paying down your debt. In short, Ramsey suggests that you make minimum payments on all but the debt with the lowest balance. Once the low-balance debt is paid off, you add the dollars that had been going there to what you’ve been paying against the next lowest debt. And so on. The idea is to pick up steam in paying down your debts by knocking them out one by one, and piling up the payments that would have gone to each of the paid off debts in order to knock out the next one. Sounds enticing, but is it a good idea?

To my mind, what you should really be doing is paying down the debts with the highest interest rate, regardless of balance. It just makes intuitive sense to pay off the most costly debts first. Once the debt with the highest interest rate is paid off, add those dollars to what you’ve been paying on the debt with the next highest interest rate, and so on. So who’s right?

I was actually inspired to look into this in greater detail by a recent post over at the Wealthy Blogger (Update: That site, and thus the post, have gone missing). In that post, Mike introduces yet another approach. As outlined in The Automatic Millionaire, this approach is based on the ratio of the outstanding balance to the minimum amount due. Divide the latter into the former, and concentrate your payments on the debt with the lowest resulting value. Once that’s paid, add the dollars that had been going there to what you’ve been paying on the debt with the next lowest ratio. Lather, rinse, repeat. Again, sounds like it might be a good idea. So let’s look deeper.

Consider a family with the following debts:

Visa ($7,500 @ 13%, minimum payment = $150/month)
MasterCard ($10,000 @ 19%, minimum payment = $250/month)
Car Loan ($5,000 @ 8%, minimum payment = $275/month)

Note that I essentially picked these values out of thin air.

Now, let’s first consider what happens when you make only the minimum payments month after month:

Months to pay in full: 72
Total amount paid: $10,685.54
Total interest paid: $3,185.54

Months to pay in full: 63
Total amount paid: $15,544.23
Total interest paid: $5,544.23

Car Loan:
Months to pay in full: 20
Total amount paid: $5,310.14
Total interest paid: $310.14

So it would take a grand total of 72 months and $31,539.91 to pay off the initial $22,500 in debt. Not too good.

Now let’s assume our hypothetical couple can actually afford to pay $1,000 per month toward their debts, rather than just making the minimum payments. What’s the best way to allocate these dollars? According to Ramsey, they should attack the car loan first, since it has the lowest balance. In other words, they’ll be paying $150/month toward their Visa bill, $250/month toward their MasterCard, and the balance ($600/month) toward the car loan. Using this approach, the car loan gets paid as follows:

Car Loan:
Months to pay in full: 9
Total amount paid: $5,126.70
Total interest paid: $126.70

At that point, the next highest balance is the Visa, so they add the $600/month from the car loan to the $150/month they already been paying, and they finish off the Visa.

Months to pay in full: 19
Total amount paid: $8,477.38
Total interest paid: $977.38

And from this point on, the entire $1,000 gets poured into the MasterCard until it’s gone.

Months to pay in full: 27
Total amount paid: $13,013.74
Total interest paid: $3,013.74

So it’s all done in 27 months at a cost of $26,617.82. That’s a net savings of 45 months and $4,922.09 in interest payments. Not too shabby. But could they do better?

Let’s look at what would happen if they hit the highest interest rate first. In this case, they’d attack the MasterCard, Visa, and car loan, in that order. The result? The MasterCard ends up as follows:

Months to pay in full: 20
Total amount paid: $11,572.27
Total interest paid: $1,572.27

Coincidentally, due to the lower initial balance, the car loan ends up getting paid off during that same month, even thought they’ve only been paying the minimum amount each month.

Car Loan:
Months to pay in full: 20
Total amount paid: $5,310.14
Total interest paid: $310.14

So now the whole ball of wax gets applied to the Visa, wiping it out as follows.

Months to pay in full: 26
Total amount paid: $9,093.73
Total interest paid: $1,593.73

So they’re out of debt in 26 months at a total cost of $25,976.14. That’s a month sooner, and they’ve saved an additional $641.68.

What about the approach advocated in The Automatic Millionaire? In this case, the car loan has the lowest initial ratio (and it turns out that it remains lower until it’s paid in full). Thus, as with Ramsey’s approach, our hypothetical couple starts out hitting the car loan the hardest, at $600/month.

Car Loan:
Months to pay in full: 9
Total amount paid: $5,126.70
Total interest paid: $126.70

At that point, the MasterCard has the lowest ratio (and it remains lower than the Visa until it’s paid off). So they switch to paying $850/month on their MasterCard and continue paying the minimum on their Visa.

Months to pay in full: 21
Total amount paid: $12,052.55
Total interest paid: $2,052.55

And now it’s time to kill off the Visa.

Months to pay in full: 27
Total amount paid: $9,114.65
Total interest paid: $1,614.65

Thus, in this case, the more convoluted, ratio-based approach takes the same length of time as Ramsey’s approach, although the remaining payments in that final month are slightly lower, bringing the total to $26,293.90. This is a savings over Ramsey’s approach of $323.92, owing to the fact that the vagaries of the numbers that I picked to start with resulted in the high-interest MasterCard getting attacked before the Visa.

The bottom line…

Snowball: 27 months; $26,617.82
High interest first: 26 months; $25,976.14
Automatic: 27 months; $26,293.90

If you work through the math, the best you can hope to do (in this specific case, as well as in any other) is to attack the highest interest rates first. In some cases, Ramsey’s approach will equal this approach (if lowest balances are on highest rate debts then the two approaches are the same), but it will never exceed it. Similarly, the approach advocated in The Automatic Millionaire will, in some cases, equal the performance of the high-rate approach – but only if the ratios work out such that the highest rate debts get paid first. But, like the ‘debt snowball,’ this approach will never beat the high-rate strategy.

With regard to Ramsey’s approach vs. the Automatic approach, the relative performance for any given scenario will depend on the numbers. In some cases, Ramsey’s approach will do better, in others it won’t.

I should note here that, although the numerical differences in this particular example aren’t that huge, they can work out to be pretty sizable depending on the amount of debt involved and the structuring of the interest rates.

This isn’t to say that an approach such as Ramsey’s isn’t worthwhile. For example, under Ramsey’s scheme, the first debt gets knocked out very quickly, and some people may need that psychological boost to keep at it. In contrast, it took twenty months to knock out the first debt under the high-rate scenario, although two debts (MasterCard and car loan) ended up getting knocked out that same month.

But for people with sufficient self-control, you can do better by paying off debts from highest to lowest interest rate. Then again, maybe people with self control don’t get into debt in the first place…

Published on May 9th, 2005
Modified on June 23rd, 2011 - 692 Comments
Filed under: Credit Cards, Debt Reduction

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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692 Responses to “Dave Ramsey is Bad at Math”

Pages: [1] 2 3 4 5 6 7 8 9 10 11 … 14 » Show All

  1. 1
    Michael Says:

    Great analysis. Interesting to see 3 approaches compared.

    I will say that the Dave Ramsey approach has one key point that does greatly differentiate it from any other method…

    Ramsey advocates “small victories” to get someone started. To someone that has a great amount of debt, the thought of being debt-free can seem about as doable as winning the lottery. I can see how knocking out your smallest debts can give you that extra boost you need to continue the path to becoming debt-free. To only be receiving 7 bills in the mail every month instead of 10 keeps your mind on the optimistic side of the field.

    However, if you are the type that is mathematically oriented and you are 100% committed to becoming debt-free, then Dave’s approach could become irrevelant, as you don’t need the small victories.

    As for me, I have been dieting now for 6 weeks and I have lost 1-2 lbs per week. I wonder how I would have felt if nothing had happened in weeks 1 thru 5 and then one night a huge chunk of my butt just fell off! I bet thats what it’s like to knock out that killer $20,000 credit card debt!

  2. 2
    nickel Says:

    Yeah, I agree that the Ramsey method can help in the motivation department. And if that’s what someone needs then, by all means, they should do it that way. It might actually be the case that the people that are the most capable of pulling of the ‘high-rate first’ approach (i.e., the math-oriented analytical types) are the least likely to find themselves in dire financial straits. After all, if you’re anal enough to compare these three strategies down to the penny just to prove yourself right, then you’re probably not going to be carrying massive amounts of revolving debt…

  3. 3
    Joshua Kersey Says:

    Fortunately for us, Quicken has a free online debt reduction planner that considers balances and interest rates and develops the same strategy. It’s how I decided which credit card to pay off first, and I’ll have to say, I’m happy I did with two successes under my belt! The only down side is that it doesn’t take into consideration planned rate changes (like a card that will go from 0% to 9% or whatever).

  4. 4
    Brian Says:

    A better overall approach would be to first call up customer service at your credit card with the lowest interst rate, in this case Visa, and simply ask them to lower it. Most times they will knock a few percent off with very little coaxing. Then call the customer service at your other credit card company and try to negotiate a better rate using your lower rate as leverage. If one rate is still significantly lower, as in the example above (13% compared to 19%), raise the limit on the card with the lower rate and transfer a portion of the balance from the other card leaving enough open credit to not hurt your credit score. Then start paying the minimum on the car loan and the lower rate card and pay the rest to the higher rate card. This will approach should have the balance paid off sooner with the least interest paid.

  5. 5
    Jeff K. Says:

    While I was working on my MBA, I came across Dave Ramsey on the radio. Initially I listened because he is very entertaining to listen to. Secondarily, I was intrigued with the “debt snowball”. I could not believe what he was saying (especially since I was in the middle of my final finance class). As a 30-year old who had been paying down credit card, school loan, and car debt for 10+ years, I was practically an expert to boot! ;)

    There is no doubt that, mathematically, paying down the highest interest rate debts saves money – on paper. The problem is human nature. You can’t close an account with a balance (at least most of the time). By paying a debt to zero you have essentially “killed” that debt. Since my ten years of “expertise” didn’t seem to work, I gave the snowball 18 months to see what it could do. That 18 months turned into 3 years and allowed me to get rid of $65,000 in consumer debt. Even being an analytical person, the emotional factor was the missing ingredient I needed.

    For some, maybe going highest interest works, for me I just needed an emotional boost. We now only have the debt of our home and it feels oh so good.

    It’s good to see that there are people that are essentially on the same team trying to get rid of debt. Dave Ramsey condones such things – keep it up.

  6. 6
    Jose Anes Says:

    Human psycology is interesting, and has to be factored into debt reduction plans.

    Some people feel that they have made progress if they can close open credit card accounts.

    Other people feel progress if they can reduce outstanding balance.

    I can only feel progress if my networth number climbs month by month at a faster pace that it climbed the last month.

    Whichever works for you, but keep owning more, and owing less :)

    My contrarian method for Credit Card Management.

  7. 7
    Michael Says:

    In his defense, I’ll say that Dave makes no qualms about why he advises debt payoff in the manner he does:

    “We are more concerned with modifying behavior than correct mathematics,” he writes. “Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of those times.”

    I didn’t work my debt payoff Dave’s way, but I understand entirely the motives behind it. The people who most need Dave’s advice are probably those who are also most likely to need the psychological “umph” provided by lopping off their debts one by one, and having some quick successes.

    Those of us who understand the intricacies of all this … well, we have spreadsheets to tell us what to do, rather than a Type-A personality on the radio.

    It’s not likely that we would give up so easily, either.

  8. 8
    Mike Hillyer Says:

    That umph means a lot. I know in my case killing off some low-hanging fruit really boosted morale with my wife and I.

  9. 9
    The Comedian Says:

    You have a miscalculation in one of your scenarios.

    In the one that contains

    Thus, as with Ramsey’s approach, our hypothetical couple starts out hitting the car loan the hardest, at $600/month.

    Car Loan:
    Months to pay in full: 20

    If you paid 20 months on the car note you’d have paid it off at least twice.

    Otherwise this is a great piece. I have a buy-side stock trading MBA friend who taught me this valuable lesson about 6 years and $50,000 in student loans ago. I used to attack the smallest balances first, enjoying the small victories of getting Paid-In-Full notes back from the banks, but he finally convinced me that it is always numerically better to pay off the highest interest rate first.

  10. 10
    nickel Says:

    Fixed it, thanks. The car loan should be paid off within 9 months under that scenario, not 20 months.

  11. 11
    thc Says:

    Ramsey’s approach certainly doesn’t make the best financial sense. But as a CFP who has worked with individual clients for over 10 years, I know that lack of self-dicipline is the greatest factor in financial failure. The “small victory” plan Ramsey proposes can help many.

  12. 12
    Jonathan Says:

    I think Dave Ramsey’s advice works well for his target audience, like the commenter above suggests. For instance, he also says to not have any credit cards at all. For people who can’t handle a credit card, this is good advice.

  13. 13
    The Aardvark Says:

    We used Ramsey as a jumping-off place. Working from a place of emotional isolation, as many debt-heads do, it is helpful to hear a friendly voice telling you that you can conquer the beast, and then giving you a practical plan to get started.
    In many ways, ANY plan is better than NO plan.

  14. 14
    DigitalMan Says:

    If you’re really following Dave’s plan and are intense about the interest won’t hardly amount to much anyway. And if people were good at math they wouldn’t be in debt in the first place.

  15. 15
    RLR Says:

    No, Ramsey isn’t bad at math, since he has often said that, strictly mathematically, paying highest interest first makes more sense. But comparing the two methods assumes you complete both methods – which is not the case even close to 100% of the time for either. Based on Ramsey’s 20 some years of counseling folks in debt, he’s found that in using his method they actually complete the process much more often, thus on average getting out of debt faster than those who use the higher interest first method. Which means using Ramsey’s method makes good mathematical sense.

    Just curious, how many years of successfully counseling folks on getting out of debt do you have under your belt? Yeah, that’s what I figured. 8)


  16. 16
    nickel Says:


    I completely understand and recognize the wisdom of Ramsey’s thinking. In fact, if you read closely, you’ll even see the following:

    “This isn’t to say that an approach such as Ramsey’s isn’t worthwhile. For example, under Ramsey’s scheme, the first debt gets knocked out very quickly, and some people may need that psychological boost to keep at it. In contrast, it took twenty months to knock out the first debt under the high-rate scenario, although two debts (MasterCard and car loan) ended up getting knocked out that same month.”

    The whole “Bad at Math” title is somewhat tongue in cheek. And you’re right — I haven’t spent much time counseling people on how to get out of debt. But I *have* spent the last 35 years staying out of debt. ;)

  17. 17
    petehatesdebt Says:

    As others have pointed out in defence of Ramsey, he does not claim the snowball method is the best mathematically — only that in the real world IT WORKS. It works because people are no computers. People need positive reinforcement and the emotional boost given by getting bills paid off and starting with the smallest ones does just that. I can tell you from experience that I have tried and failed with other methods of getting out of debt but I am sticking to the debt snowball.

  18. 18
    mr_peanut Says:

    “If we were doing math, we wouldn’t be in debt in the first place.”

    – Dave Ramsey

  19. 19
    Yo Spiff Says:

    I don’t know if I can really add anything else to what has already been said by Dave’s proponents. It’s a plan that changes behavior, and poor behavior with money what gets most people into trouble. If someone has the self discipline to do it by interest first and keep with it, that’s great. But smallest first has helped motivate me. All my annoying small debts are out of my way and I can concentrate on the big stuff now.

    Dave frequently gives advice that is not mathematically optimum, and he admits this is so, but the objective is to change your behavior and attitudes.

  20. 20
    Guest Says:

    Actually, there is one more thing to consider. Which helps you pay off best at the lowest cost AND helps improve your credit score in the process.

    I don’t have time to do the analysis but if your objective was to increase your credit score (FICO) to purchase a home next year then your payback plan would likely benefit from a change.

    For example, you get a big ding on your credit report for having large revolving credit and/or being close to the maximum. Let’s say that the credit limit on the Visa was 7.5k and it’s maxed out. This gives your a 100% ratio and perhaps knocks 50 points off your score. Are you better off paying at least half of it off first to increase your credit score by 25 – 40 points?

    By improving your credit score, your interest rates on all other debts comes down (in theory).

    So if this were the case which would you pay first to optimize your credit score AND reduce your debt?

    Visa ($7,500 @ 13% AND 100% maxed, minimum payment = $150/month)
    MasterCard ($10,000 @ 19% AND 50% maxed, minimum payment = $250/month)
    Car Loan ($5,000 @ 8%, minimum payment = $275/month

    Note that the car loan has the least negative effect on your credit score (provided you are not late) so perhaps this should be paid last?


  21. 21
    nickel Says:

    Guest, thanks for the comment. One thing that I’m not sure about is whether or not your credit card usage is calculated on a per account basis, or if it is calculated based on the sum of your debts vs. the sum of your credit limits. Consider this scenario:

    $7500 balance on $7,500 limit = 100% usage
    $0 balance on a $30,000 limit = 0% usage

    If we average the usages, you’d be at 50%. If you sum the balances and the limits and then figure usage, you’d come up with $7,500/$37,500 = 20%.

  22. 22
    Guest Says:

    According to various websites, the FICO credit/debt ratio is done per credit card vs. aggregate combination.

    Here is an excerpt from http://homebuying.about.com/cs....._score.htm

    Keep Debt to a Minimum

    * Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.

    * Pay off debt, don’t move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.

    * Don’t close unused accounts, because zero balance might help your score.

    * Don’t open new accounts that you don’t need as a quickie approach to altering your debt-to-credit-limit ratios. That can lower your score.

  23. 23
    ramsey Fan Says:

    As dave would say it,
    Don’t worship at the alter of FICO score!

  24. 24
    Michael Riley Says:

    I am the one who coined the phase “payment snowballing”. Back in 1994 I created a free program call “Credit Card Math” available from http://www.creditcardmath.com.

    I was in the US Marine Corps at the time. Since then many, many people have taken my idea and run with it.

    Thanks for letting me toot my horn.

  25. 25
    JWM Says:

    Um, Michael, I’m not saying Dave Ramsey coined it, but it was in his book “Financial Peace” in 1992…so…

    When exactly did you “coin” the phrase? Some time before then?

  26. 26
    Onree Says:

    The mathematical in your example because you had only thre debts, each sizeable. I started out about three years ago when I went “on the wagon” and made a vow against new debt and to pay of all my debts. I had 22 debts, ranging from the $30 that I had owed the babysitter for a month, $68 to the plumber, $280 on my kid’s trumpet, things like that, on up to almost $20,000 to Mastercard.
    Of my 22 debts, 17 were under a thousand dollars. Using Ramsey’s snowball system, I paid off all of those smaller debts in the first year. (Actually 14 months.) A lot of positive reinforcement, and much less finagling, juggling and keeping track with only five debts instead of 22. A lot of local small businesses were happy to see me walk in the door, money in hand. Under your model, the babysitter and plumber would still be waiting.
    I don’t think that having only 3 debts to juggle is realistic model to usein the real world. It does make the math easier, though.

  27. 27
    #1 Ramsey Fan Says:

    Many of you have some good points, however, as Dave says “if we were doing math, we would not be in credit card debt.” Mathmatically, credit cards are not a good deal. Here is why banks have the tallest buildings in every major city. The bank borrows your money at 2%-4% (if your lucky) in the form of a savings account in the meantime they let us borrow their money at 10%-20% in the form of a credit card. You multiply this by however many millions of people and they make a very healthy spread and are able to afford the tallest buildings and nicest furniture off of the general public’s lack of understanding of how money really works. Banks and credit card companies are a lot of things but “dumb” isn’t in the equation. It is just like Las Vegas. I hear people all of the time say they win over time gambling on boats and betting football games. Ok, they are right, they as an individual are beating up on Vegas and the credit card companies. They have multi-million dollar businesses out-smarted. Give me a break. Las Vegas does not have those big hotels because they lose and bookies dont drive around in expensive Cadillacs because they lose either. Mathmatically, I guess a financial professor could calculate how paying the highest interest rate would save you money, but how many rich financial professors do you know. It is emotion that got you into the mess, and it is emotion, not math, that will get you out. I am not saying to totally ignore math, but you have to get quick wins to stay motivated. I guess when one of the bloggers has as much success in people out of debt with their method as opposed to his, then we can talk. As one of the bloggers said, the important thing is that many people on this site are trying to get out regardless of the method. I can tell you from experience though, Ramsey’s method works and my life has never been better financially because of his common sense approach to personal finance. Good luck to all and get gazelle intense!!

  28. 28
    nickel Says:

    #1 Ramsey Fan asked “How many rich financial professors do you know?” I guess I’d be inclined to turn that around and ask how many poor (or debt-ridden) finance professors do you know?

  29. 29
    #1 Ramsey Fan Says:

    Nickel says,”How many poor or debt ridden finance professors do I know?” The answer is a lot along with many CPA’s, Tax Advisors, Attorneys, Bankers, and even some Doctors. I guess it depends on your definition of poor. Many average income debt free people have more disposable income than a Doctor for example because most Doctors get out of school with huge student loans and they immediately live the “Doctor Lifestyle” (leasing a Mercedes/Lexus, buying an expensive home, boat, etc) all in an attempt to prove to people that they have “made it” when in fact all of the great income they are producing is funding the bank and going out in payments. The problem with finance professors and academia when it comes to finance is their justification for everything is leverage (using other people’s money). The only problem is they always talk in terms of a “best case scenario” and forget sometimes to consider risk. In a “best case scenario” the math would work everytime, however that is not how life works. As the bumper sticker says —-happens. I dont think Donald Trump is wondering where his next meal is coming from, but he found out a little bit about how “leverage” can bite you when he declared bankruptcy because he had too much money tied up in leveraged real estate. This, by the way, is also what happened to Dave Ramsey, however he has learned his lesson and passed it on. If you always depend on the “best case scenario” a basketball coach would never have to make adjustments at halftime according to what the other team does. Don’t get me wrong there are plenty of people who have made a fortune “leveraging” everything in sight. These people though are few and far between. You can win a lot of money in Las Vegas as well, but you will have to risk a lot to do it and not many people can win in the long run playing this game. It reminds me of these 3:00 am info-commercials saying that you can acquire real estate with no money and leverage your way to the bank in just 30 days. Some of this is fine, but for most people it is false hope and pipe dreams. If people have been successful with this type of thinking then thats great,more power to them. Being able to take risks and come out ahead is part of what makes our country great. As for me, I would rather take it a little slower and pay CASH for everything thereby lowering my risk and maybe my return, but so what if it takes a little longer, most people I know that have money have built wealth over time not with a $3.00 lottery ticket. The next time you are in a “rich neighborhood” look around and see how many “for sale” signs you see. Some of these people are so leveraged and have the desire to impress others so much that they cannot buy furniture for their castle or if they do they put it on another brilliant idea a home equity loan. Lets build up equity in our largest asset and then borrow on it so we can owe more almost then it is worth. Why do you think the banks push this stuff so hard. Why do you think every car commercial you see is trying to get you to LEASE or “FLEECE” as Dave would say. The reason is because we are losing and they are winning! We have to step out of our microwave “I want it now” attitude and think about the incentives companies have when they try to sell us these type of products. Put yourself in their shoes and ask the question “why” It is simple why companies spend millions of dollars on adverting because it works! As Dave says: “If you want to be rich, look aroung and see what rich people are doing.” You will find that people that truly have money behave in a way that is much different than we see on TV or in the movies. Georgia State Professor and author Thomas Stanley proved this in his book “The Millionaire Next Door.”

  30. 30
    #1 Ramsey Fan Says:

    Jeff K, yo spiff, petehatesdebt, and RLR have the right idea! Modify BEHAVIOR and you will get out. Believe me, I am living proof that it works!!

  31. 31
    #1 Ramsey Fan Says:

    comments anyone? How many of you agree/disagree?

  32. 32
    Gregg Hudak Says:

    Since buying my Sirius I’ve been listening to Dave Ramsey. As a financial counselor and CFP candidate myself, Dave is preaching some bad stuff, especially when it comes down to paying off your debt by paying off the “lowest balance” first. WRONG, WRONG, WRONG. Any financial person knows, as has been said here, that you conquer the highest interest rates first in order to pay less interest over time.

    Secondly, Dave told one called to simply “work your PMI into your mortgage”!!! What?! Now you’re paying PMI for life. C’mon Dave, be responsible and if you think folks should “pay off” their mortgages first before anything else (retirement savings, etc.), then you’ll have a bunch of retirees with nothing to show but an illiquid asset and no cash for spending.


  33. 33
    #1 Ramsey Fan Says:

    In response to Greg’s analaysis of Dave Ramsey–It doesn’t sound like you have been listening to Dave on Sirius for very long, or if you have you have not been listening closely enough. I have been listening to Dave for about 3 years, and not once have I ever heard him say to pay of your mortgage before you start saving for retirement. If you listen to him, he talks about the “Baby Steps.” If you say you listen to him, you know what I am talking about because he says it everyday.

    1) baby emergency fund of 1000.00
    2) pay off all debts -debt snowball
    3) finish the emergency fund 3-6 months expenses in the bank-Murphy Repellent
    4) 15% of income into 401k and ROTH IRA
    5) College funding (if it applies
    6) Pay off mortgage early
    7) Build wealth like crazy-Give a lot away

    The last time I checked “4″ comes before “6″ so he does not suggest paying your mortgage off before you do retirement. What he does recomend is that when you pay off all of your debt and have no payments, it is easy to attack you largest debt (your mortgage) and fund your retirement vehicles 401k roths etc at the same time. IF it came down to paying off your mortgage and funding retirement but you could not do both. He would tell you to fund retirement first, and then pay off your house. His point is that if you are not funding the bank with payments it is easy to do both. Dave talks all the time about being “house poor” meaning you dont necessarily want to have a paid for house and no money. Almost everyday!!
    As far as the intrest rate/lowest balance first argument, I will garauntee you that if we take 100 people and had 50 of them do it your way Highest interest to lowest–(regardless of the balance) and 50 people Dave’s way lowest balance to highest balance(the debt snowball) I will garauntee that his way will win more often than yours. This is changing behavior, not math. I cant stress that enough. When you are dealing with something emotional whether it is losing weight or losing debt, you need some quick wins!! IF you pay off the debt as quickly as Dave suggest the math wont make any difference anyway. If you want to stay in debt longer, and save enough interest to buy a Big Mac when your done go ahead, but I along with thousands of others have done it Dave’s way and IT WORKS–PERIOD. At the bottom I was making HUGE payments and I never would have done that paying off the highest intrest rate first. When you get as many people out of debt in your financial couseling business as Dave Ramsey has then maybe we will have an arguement

  34. 34
    Emma Says:

    It’s obvious those that only listen to what Dave teaches have an abundance of opinions. Good for you. But Dave has an abundance of practical solutions for practical people who don’t care about math…they care about freeing themselves from debt. Dave also has an abundance of listeners and people who have done it his way and have gotten out of debt.

    People can talk all they want about how the math doesn’t work, but, when it comes down to it, people will make changes and progress when they decide to change. And motivation, which is what Dave’s plan includes, is a huge part of it.

  35. 35
    Ben Says:

    Unfortunately, many people don’t have the willpower to pay off the debt with the highest balance first.

    Logically, it makes sense to pay off the balance on the highest interest rate first, but some people will feel that they’re not making enough progress with that method.

    If you can pay off your smallest debt and erase it completely, it will help give you the confidence and momentum you need to continue.

    You just have to decide which method is best for you. You’ll end up spending more with Dave’s Snowball method, but you’ll see the number of debts you owe shrink.

  36. 36
    Brivers Says:

    If the difference in savings was thousands instead of hundreds then I could see why the “highest interest” method would be the best bet every time. But since that’s not the case, I think people need to do what works best for them. For my wife and I, grabbing the low-haging fruit was essential. Seeing 1, then 2, then 3 … less bills per month in the mailbox was an unreal motivational tool. In 6 mos., we managed to pay off $10,000+ in credit cards, student loans and car payments – and are now, excepting our mortgage, debt free! We are also very close to having our 6 months of expenses in the bank. That’s a $25,000 turnaround in one year. In the end, use the method that works. In our case, the was the snowball.

  37. 37
    Emma Says:

    Hah, I just looked your numbers and you completely missed the debt snowball theory. You have made assumptions that minimum payments will be made on ALL debts, which is inaccurate. Then, you make the case that should you have $1,000 to pay off debts, you’d still pay more in interest than paying off high interest debt. Wrong, wrong, wrong.

    This is the debt snowball. List your debts from smallest to largest. After devising a budget, a plan, accounting for necessities only, no vacations, no luxuries, you can see how much money you have available to repay debt. It’s amazing how much you have, really.

    Once that is determined, you pay minimum payments on all your debts, with the exception of the little one. That’s right. You attack the little one with more than the minimum payment.

    So, with your numbers you provided, the smallest one would be the car at $5,000 with a minimum payment of $275.00. Let’s say that you have $1,000 a month to pay off debt, and you should since you have a total of $675 in minimum payments, you would pay $150 on Visa, $250 on Mastercard and a whopping $600 on the car! In 9 months, that car payment will be gone.

    Now, here’s the trick. Take that $600 you were paying on that car, and roll it over to the next debt, which, in this case, is the Visa card with a $150 payment. Now, you are paying $750 per month! In those 9 months you managed to pay down the Visa card to $6150.00. With a $750 per month payment, that card will be paid off in another 9 months.

    Your remaining debt will be Mastercard, now with a balance of $5,500, reduced from $10,000 with those $250.00 payments over 18 months. Rollover the $750 to this minimum payment of $250 and you are now paying $1,000 per month! In 5 and a half months that payment will be eliminated and in approximately 23 months, you will be debt free.

    That is how the debt snowball works!

  38. 38
    nickel Says:


    I understand exactly how the snowball works, and my example is perfectly in line with it. You have to, at a bare minimum, make the minimum payment on all debts, otherwise you will go into default. If you can make afford to make additional payments on the smallest one, then you can (and should) do so. But this only accelarates the process, it doesn’t change the rank performance of the debt snowball vs. the other methods. No matter how much or how little extra you apply to the debt that you choose to knock out first, the debt snowball can never do better than to match the highest interest first method.

    In your example, you upped the amount available for debt repayment, and applied the extra money to the smallest balance. To make a fair comparison, however, you have to make the same amount available for the other scenarios. And if you did so, you would see that, at the very worst, the highest interest first scenario would match the performance of the debt snowball, and in most cases, it would outperform the snowball. Because the time to total repayment would be accelarated across the board, the magnitude of the difference would shrink but, as I noted above, the rank order will remain the same.

    I should also reiterate a point that I made in the original post that seems to have been lost on many commenters:

    “This isn’t to say that an approach such as Ramsey’s isn’t worthwhile. For example, under Ramsey’s scheme, the first debt gets knocked out very quickly, and some people may need that psychological boost to keep at it. In contrast, it took twenty months to knock out the first debt under the high-rate scenario, although two debts (MasterCard and car loan) ended up getting knocked out that same month.”

  39. 39
    Emma Says:

    nickel, yes, I did up the amount. Why? Because, most people in debt have that extra cash somewhere. Either in pizza money, cable/satellite money, cell phone money, or whatever expenditure that is not a necessity. This is the most crucial element of the Ramsey plan, if you have debt, your focus should be on eliminating it. That means no vacations or luxuries until it’s gone.

    I do remember that point in your original post. Although, I have to say that personal finance is not about the numbers, it’s behavior. Face it, debt wouldn’t be an issue if we were doing math to begin with. :)

  40. 40
    nickel Says:

    Yeah, I have no problems with the idea that paying more will accelarate your appoach to debt freedom. My only point was that, even with a higher total payment amount, the snowball still won’t win out (at least not mathematically). A very important point of what you wrote, however, is that the mathematical advantage of ‘highest rate first’ shrinks dramatically with increased total payments. Thus, the more you can point toward your debt, the less my argument holds water. And I do agree with the idea that those that do the math wouldn’t be in trouble in the first place.

  41. 41
    Emma Says:

    Thanks nickel, that was my main argument. By the way, I enjoy your blog. I don’t agree with everything or everyone that posts, but I do have an open mind and appreciate other views on personal finance. Keep up the good work!

  42. 42
    John Says:

    My wife and I are on Dave’s plan.

    The only thing in your example that I disagree with is that a person would have an extra $325 to put toward that first bill. We were lucky to scrape together an extra $40 to put toward our smallest debt. Today, 13 months into the program, we put about $1300 toward the next bill on our list. By the end of the year, we will have paid off a total of 34K in 21 months.

    It is psychological. If I have to pay a little extra for that, so be it.

    I found your site because I was trying to find something negative about Dave and his program. If this is it, then I am very happy.

    Thanks for your input nickle.


  43. 43

    We had tried the mathematical approach, using info from an About.com financial guy. I guess we just lost focus, and we had at that time, probably 85k in debt (all non-mortgage). By the time we found Dave Ramsey, we had about $125,000 in student loans, car notes, credit cards & 401k loans. 2.5 years later, we have just $16,000 to go, and that will be gone in a few short months. This stuff worked for us, as we found out, it’s not about math when you get that much in debt. NOW, as we begin to invest, save for our future, pay for college, et all, it WILL be about the math. The mathematical scenarios are so much more fun to look at when you are discussing returns, versus paid interest, that’s for sure!

  44. 44
    Darin Says:

    You are using your head way too much. Personal finance is 80% behavior and 20% head knowledge. Yes, it would save a little bit of money to pay off the high interest rates first, but it’s about a whole lot more than that. If you go on a diet and the first week you lose a few pounds, you think, great I can do this, this works. It’s the same thing, you eliminate a payment and you start to see that you can do this stuff. Dave Ramsey will even tell you he said the same thing you are saying, but then he realized it made it easier for people when they saw some progress.

  45. 45
    Darin Says:

    Just to add one other thing. If we are all math wizards, then why are we in debt. If you can add and you know you have $500 to spend but you use a credit card and spend $800 then you are not very good at math. Once it again, it’s not about the math.

  46. 46
    erik Says:

    Okay, well everyone has pretty much expressed all of the different ideas surrounding this debate, so anything that I say will be highly repetitive!

    I will admit that I am a strong proponent of Dave Ramsey. It is not because he is great with a financial calculator, it is because he is real and he knows how people should act, and how they REALLY act. Ramsey is brutally honest and he does not sugar coat anything.

    If I had to guess, I would say that he is fully aware that the other methods save you about 3 – 4% more in a perfect situation. The problem is that life brings many changes and many monkey wrenches are thrown into the equation. Ramsey teaches the snowball method because he knows that most people do need the motivation.

    Many of the personal financial bloggers that comment on each other’s sites know the math AND the behavior that it takes to win with finances. However, credit card debt continues to soar in America. Until this slows down, too many people need to hear a plan that psychologically works, not one that looks good on paper.

  47. 47
    greg Says:

    The reason Dave does not do the math, and instead says attack the smallest first is simple. He states that he wants you to have “success” as soon as possible. That way you will continue and not quit. He mentions you could do the math, but by knocking off the smaller ones first you will have the percieved effect of results, sooner. Like the old saw; What we percieve… we can achieve.

  48. 48
    tammy Says:

    It’s seems that alot of you just don’t get it. I’m also one of these “nerds” who can do math. The math isn’t the probably…it’s the person in the mirror.

    THAT is what Dave Ramsey is all about. If you still think Dave’s way doesn’t make since…ask yourself…is your way any better than what it was last year? Are you still in debt? Are you FURTHER in debt? If your car breaks down today, do you have the CASH to cover it or will you have to rely on your credit cards or borrow money from family? It’s very simple:

    Step 1:
    Start an Emergency Fund of a $1,000! Place in a high interest SAVINGS ACCOUNT (HSBC is 4.65% at the time I’m writing this). This is NOT investment money! Do whatever you have to do to get this money in the bank…sell un-needed items, 2nd job, etc…

    Step 2:
    Start your written budget.

    Step 3:
    Afte paying off your debt (except house) you should have plenty of income to finish building your Emergency Fund of 3-6 months. Again, THIS IS NOT FOR INVESTING! Put it in savings and FORGET ABOUT IT!

    Step 4:
    The next step is to get your retirement in order. 401K, Roth IRA’s, etc… Listen to Dave on suggestions.

    Step 5:
    Now that you got YOUR retirement in place, it’s time to start saving for the kid’s college.

    Step 6:
    After you have the above steps in play, start attacking your mortgage!

    Step 7:
    After you have paid all debt off, have a fully funded ER Fund, you are saving for retirement, you are saving for kid’s college, and the house if paid off, you will have lots of CASH to build wealth and give to charitable organizations!

    It’s that simple! Just remember…it all starts with the person you see in the mirror every morning.

  49. 49
    jim Says:

    I tried the highest interest first method and got nowhere quick. I tried Dave’s method and paid off $7000 in 10 months. Like someone else said tell it to the doctor’s that I counsel everyday. By the way nickel if you have been out of debt for 35 years you can’t possibly be spending more money than you have.

  50. 50
    nickel Says:

    “By the way nickel if you have been out of debt for 35 years you can’t possibly be spending more money than you have.”

    You’re right. We’re not.

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