Dave Ramsey is Bad at Math

Written by Nickel - 600 Comments

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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:

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

MasterCard:
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.

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.

MasterCard:
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:

MasterCard:
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.

Visa:
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.

MasterCard:
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.

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 - 600 Comments
Filed under: Credit Cards, Debt Reduction
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About the author: Nickel 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!

600 Responses to “Dave Ramsey is Bad at Math”

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551
Chris Says:
March 15th, 2010 at 4:39 am
Mary, banks contributed heavily to the market plunge via their sketchy mortgages, but I’m curious as to the role credit card companies had in this?
552
Mary Says:
March 15th, 2010 at 12:17 pm
Gee Chris,
Have you read the fine print on your Credit Card? They are owned and distributed by some of those big banks that offered sketchy mortgages that needed bailout money. Chase, Citibank, Bank of America, JP Morgan, just to name a few. But they must be so much better at their handling of their Credit Card distribution which is why the government had to put regulations on their interest change abilities and who they can even offer a credit card to. Maybe my dog can help them get out of debt with his credit card offer to borrow money at 23% interest rate that he received in the mail just last week!
553
Mary Says:
March 15th, 2010 at 2:07 pm
And furthermore Chris, BAILOUT!!! Repeat after me BAILOUT! Money the government used (that they did not have that you now get to give, not loan, the government) to helped them get Credit Card companies out of their HUGE debt. Sounds pretty financially smart and savy of those Credit Card companies and the government. But lets see if they pay it off by starting with the one with the highest interest rate first, they might save a couple hundred bucks. Look how better off they will be by using good math skills.
554
Chris Says:
March 15th, 2010 at 4:50 pm
Interesting perspective, Mary. But it addresses the situation after-the-fact. What got us in to this financial mess to begin with was banks offering mortgages to people who couldn’t afford them, and of course we had to have those people who were taking out those mortgages, knowing they didn’t have the means to make the payments. The banks didn’t care that the mortgages were bad because they sold them to Wall Street, which then bundled them in to securities. The homeowners didn’t care because they were either 1) very bad at math, or 2) just looking to live the ‘high life’ for as long as it lasted.

Then there’s the credit card usage. Yes, as people charged up balances that they couldn’t pay, the credit card companies (banks) boosted the interest rates. But it was the cardholders who ran up those balances, not the banks. The interest rates on my 3 credit card were bumped from app. 12% to 18%, and finally to 23%. It meant nothing to me because I didn’t owe them a dime.

What you don’t seem to be acknowledging is the cultural influence of hedonism and greed that fueled this whole mess, and it was on the part of the consumers just as much as the bank execs and mortgage brokers.

The lesson learned for all of us is that if you can’t afford it, don’t buy it. Use those math skills when contemplating a purchase, be it a home or a Starbucks latte. Culturally we needed to be brought back to basics, or at least brought back to what we can afford.
555
Mary Says:
March 15th, 2010 at 7:07 pm
Chris,
first- I don’t drink coffee
second- I don’t have any debt
third- so glad you are out of debt, no home mortgage, and on your way to becoming a millionaire.
fourth – interesting that you would ask me how credit card companies had a role in any of this, accuse me of not acknowledging greed, then state mortgage companies (same banks who own the credit cards) as the ones still at fault, and acknowledge that ccc’s were at fault as well.
fifth – do you just want to be right, even though you may be wrong?
556
Jeff Says:
March 26th, 2010 at 12:05 pm
It’s not a math thing, it is a getting rid of a whole debt company thing. People are overwhelemed with 20 different payments. Getting rid of a debt helps relieve the stress. Dave admits it isn’t the best way math wise, but if you are committed to getting out of debt, it won’t cost that much more. If you are getting out of debt, use whatever method you want. Just get out of debt.
557
Jeff Says:
March 26th, 2010 at 12:08 pm
So the overall differene is less than $1,000. The bottom line is the debt is gone and now that $1,000 can be invested. 72 months is a steep price to pay for going that far into debt. It didn’t just happen overnight so the debt won’t go away overnight.
558
Shannon M Says:
March 26th, 2010 at 4:24 pm
Well I love the comments. As of now a little over a year later I have paid off a total of $21,000. I have all of my credit cards paid off (6) and I paid my wife’s Mustang off. Her payment alone was $386.00 a month. It felt so good walking into the bank to make the last payment……..Now I am going a little off the path of Dave Ramsey and I will start to pay off my 2nd mortgage to my house early. To me it makes the most sense because I want to sell my condo as soon as possible because I have a baby on the way. I owe 26,500 on it and the interest rate is high at 9.5%…..But it is still paying off debt….Amen
559
Jeff Says:
March 28th, 2010 at 12:19 pm
Shannon, if you are going to sell the condo, why pay down? Why not just save the money in a separate account? Even if you are underwater, you will still need to come up with the cash? How long until you sell the condo? I guess if it is more than a year, paying down the 2nd is fine.
560
Buddy Clark Says:
May 15th, 2010 at 12:37 pm
Your lead in is very misleading, Mr. Ramsey’s plan seems to me to be right on, and your last line in your article says it best,

“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…”

I have just started reading and applying Mr. Ramsey’s theories and I find if I had followed his simple clear-thinking plan years ago I would not have been reading your article, I would be enjoying life instead of looking at another ten years of working, while am now at the age of 63. :(:(
Buddy Clark, esquire
561
Chris Says:
May 15th, 2010 at 1:24 pm
Just read Mary’s comment of March 15th. If you happen to read this Mary, I’m sorry that I put you on the defensive, it was not my intent. I was speaking in generalities, not about you in particular. But it’s obvious you are not able to have a discussion of differeng views without feeling slighted in some way.

It all boils down to common sense and the self-esteem to not feel the need to face outward with a financial picture that doesn’t exist.

And Mary, I am not on my way to being a millionaire, I’ve been there for quite awhile. I used credit cards all along the way, and still do. If I had followed Dave Ramsey’s advice, particularly the ’state school / no student loans’ advice, I would probably be making 10% of the income I now make. His advice is not good for everyone, not by a long shot.
562
Jeff Says:
May 15th, 2010 at 2:33 pm
@Chris, the majority of parents/students don’t do any kind of research into the job the kid wants to have with the cost of college. Many people pay way too much for school for a job they could have gotten from a cheaper school. It isn’t the school that makes a person smarter. That person already has the traits to become successful. I know plenty of people that are wealthy without going to a private college or spending 100K to go to school. You did well probably based on who you are, not the school you went to. Going to TCU or SMU or University of Texas for the same degree will probably result in the same career path with minor exceptions of how well a person networks while in school. There are thousands that graduate from state schools that go onto be successful as well as those from private colleges. The reality is, why saddle yourself with an extra 50K in debt if you don’t have to.
563
Jason Says:
May 19th, 2010 at 6:40 pm
Personally I have taken a slightly morphed approach to my debt. I too have done Ramsey’s Financial Peace University and loved it. I am a nerd, so when I looked at the debt snowball from a mathematical point of view it did not make sense. However, when I took Nickel’s approach I became so frustrated (because debts were not being paid off quickly) that I stopped all together. Ironic, isn’t it that the psychological effect can be so strong that you would step away from the very thing that would solve your emotional woes.

What I did instead was to take the few smallest debts I had and paid them off starting with the one with the highest interest. Once those were paid off I grabbed the next smallest set, and so on. That way I was still doing things mathematically, which appeased the logical part of my brain, but I had those small victories too, which appeased the emotional part of me.

Ironically I am good at math and it was always one of my favorite subjects yet I failed to apply it to my life. Instead I took the Tim Taylor (Home Improvement – perhaps I’m dating myself mentioning that) approach to life where I learned life lessons by doing ALL the wrong things first. Oh well. Thankfully I can say that I am not far from being completely debt free, which is a wonderful comfort.

Hey Nickel, I’m curious if when you posted this article 5 years ago you thought it would produce so many responses, especially so many from people who do not seem to read the whole article. This was a good article, thank you for showing your point of view but not discounting the other side. And BTW, I do appreciate the tongue-in-cheek title.
564
Stussie Says:
May 31st, 2010 at 8:37 am
Dave Ramsey markets to a financially unsophisticated audience, that needs that proverbial shepard. He has his niche of sheep, just like Bernie Madoff had his. I don’t take as much issue with his debt advice only his investment advice.

His demonization of credit cards simply shows how base and myopic his advice is. Credit cards are not bad; irresponsible use of credit cards is bad. I receive more consumption based benefits from credit cards than I ever could with cash.
565
Shannon M Says:
May 31st, 2010 at 10:04 am
To the post left by Don:
I went to go see Dave Ramsey in person today at the Deltaplex in Grand Rapids MI. What a rip off. They over sold tickets, people were sitting on the floor with no chairs. There was not enough parking in the parking lot of the Deltaplex so there were hundreds of cars parked in area business parking lots for blocks. When we took our first break they announced that anybody parked in an area business parking lot would be towed if they didn’t move their cars. We asked workers and even a local police officer where we can park and we were told that there wasn’t any place to park in the area that you wouldn’t be towed from. We asked for refunds and they only said that they don’t refund ticket sales. So there were hundreds of people that had to leave after hearing just 1 hour of Dave. Any good Christian person would have made sure that there was ample parking and seats at a location before holding an event there. This leaves a very bad taste in my mouth and I am sure that I am not the only one that feels they were conned out of the price of admission.

My question is did you call the Dave Ramsey show about this problem? I am not saying it didn’t happen but what steps did you take to get your money back from the people at the show? I bet they didn’t even know about the issue. One thing I take issue with is the fact that you state that good Christian people will not hold events with no parking. Christian people make mistakes just like everyone else. The key is not to be a complainer but someone who says I know that they made this mistake but I will contact someone so at least they may not make the same mistake next event with the parking.
566
Greg K Says:
June 2nd, 2010 at 8:54 pm
The bottom line is how many people has your plan gotten out of debt and how many has Dave gotten out? Also, most people fall off the wagon in a matter of weeks, like people stop dieting. You show me how many people you have gotten out of debt and it will pale in comparison to Dave’s.

Living like no one else, so later I will live like no one else.
567
Jeff Says:
June 2nd, 2010 at 9:21 pm
Dave Ramsey markets to a financially unsophisticated audience, that needs that proverbial shepard. He has his niche of sheep, just like Bernie Madoff had his.
_____
Bernie Madoff was a crook who stole people’s money. Dave is showing people how to get out of debt. I will be one of those sheep any day. There is no advantage to going into debt except for the house, and even then tons of “sophisticated” people got adjustable rate mortgages and bought too much house. If credit cards are so great, why are there millions of people drowning in debt? I guess the whole country is unsophisticated according to you. If Dave has such an unsophisticated audience, why is he like the #5 talk show host? I am pretty knowledgeable and I learn something at least once a week from him.

He knows how to get out of debt and buy with cash. What is so wrong about that? His job isn’t to give investment advice. He isn’t a lawyer or an accountant. All he says is to investigate good mutual funds with a track record. There are plenty of people that don’t have to have 24 mutual funds. Many people can get by with about 6 funds.

There are plenty of overweight people and if there was a person on the radio that helped people lose weight by telling them not to eat more than expend, is that a bad deal? Same with money. You can’t spend more than you make.
568
Dark Says:
June 8th, 2010 at 10:31 pm
You do realize his system is INTENDED to be this way. If you have spent any time listening to his show you no doubt have heard a call from someone saying much the same of what you’re saying.

The point of Dave’s system isn’t in the math, it’s in the personal momentum and drive to actually become debt free. He freely admits his system isn’t the most efficient use of money, but what it will do is let people see what is happening and drive them to continue, to see the progress.
569
Franklin TN Says:
June 9th, 2010 at 3:39 pm
Do you think Fox News replacing Dave Ramsey with Eric Bolling will affect his popularity?

http://www.coolsprings.com/new.....ve-ramsey/
570
Jeff Says:
June 9th, 2010 at 4:15 pm
Good thing I didn’t upgrade and get Fox Business News to watch Dave. I think FBN will lose a ton of viewers. I guess the world is debt free now.
571
Chris Says:
June 9th, 2010 at 5:33 pm
I think Dave has seen his day. He has a very narrow offering, and it’s been exhausted. My guess is that he’ll do a lot more FPUs in churches, and of course he has his radio gig for as long as that lasts.
572
jasen Says:
June 20th, 2010 at 12:43 am
If there is only 1 person, then self control it is, but when it is two people. the quick victories help get the other person on board and gain momentum.
573
Jim Says:
June 24th, 2010 at 3:45 pm
It’s been over (5) years since the first post, and folks still feel very strongly about both sides of this. I love the nay sayers especially; why don’t you go away and use your liberty for something else! Gotta make a point, look brilliant, bla bla bla….. I have an uncle like that. We all hate him. Go Dave! And may God bless the United States of America!
574
Ricky Says:
June 25th, 2010 at 1:04 am
Hi,

I guess most of you guys live in America and I don’t know the entire story but in Australia, using Dave Ramsey’s method makes more sense mathematically. Most of the credit card companies charge an annual fee and a lot of unjustifiable amounts as long as you keep the credit card with you. So, it just makes sense to pay the ones with the lowest balances,close it as soon as possible and get rid of the annual fee once and forever and apply that money to the debt with the second least balance and so on. Dave Ramsey’s method is indeed very motivating and provides a good boost of morale.
575
Chris Says:
June 25th, 2010 at 6:15 am
Rick, you make a very good point, and I think we’ll see annual fees pop up more and more in the U.S. I’m an avid credit card user and have been all my life, and don’t have any intention of stopping the use of credit cards to pay my day-to-day expenses. Love the convenience and rewards $$! However, I am unwilling to pay even a penny in order to use credit cards, so when the banks start charging an annual fee, I will cancel the credit cards.

Jim, if Dave Ramsey’s plan works for you, then you should certainly stay with him. Ramsey’s plan would not have worked for me in any sense of the word. If I had followed his advice my financial situation would be drastically different than it is today, and not for the better! He caters to a clientele with a certain financial/career demographic, and for those folks he gives great advice. For those outside his target demographic, his advice would be financial suicide.
576
Jeff Says:
June 25th, 2010 at 9:24 am
Chris, which financial/career demographic are you inferring? Rich people that make millions declare bankruptcy all the time, people that worked as janitors have left millions to charity. How is it financial suicide to stay out of debt and to actually save money? You can make $1,000,000 a year and have a negative net worth. Is that the kind of person you look up to? Feel free to use credit cards. 50% of Americans are overweight. If someone was on the radio getting people to lose weight, you would probably eat a bag of oreos in front of someone trying to lose weight. Dave’s methods work for those willing to commit to the program. We don’t put our budget on paper, but we also don’t have any debt, paid off our house and bought a 2010 car for cash a few months ago. Why would I want to pay off a car over 60 months when I can purchase it now. I don’t have to worry about the car being repo’d if I lose my job. Yes, there are many people that have no financial clue, but most people stay in debt their whole lives and credit cards are just one tool that keeps them there. Nobody NEEDS a credit card. We rationalize the convenience aspect, but really, how much time does it save? A few minutes a week? Any bill can be auto debited or paid online.
577
Chris Says:
June 25th, 2010 at 12:30 pm
Jeff, for those who can handle the responsibility of a credit card, no rationalization is necessary, because there’s no negative side to it. Another positive side, besides the convenience and $$ back is that it puts the buyer in the position of power. If I buy something that doesn’t work when it’s delivered, I can return it because I have all the power, not having paid for it yet. Once it’s paid for, the power goes to the seller. When I am spending my money, I prefer to be the one with the power.

As for your question about my statement about financial suicide, I have posted earlier that I took out student loans to get through school – my goal was to become a specialist that earns $700k+/year. The student loans were necessary to get me through college, med school, my internship, residency, and fellowship. During the latter years I earned a very small salary. If I had taken Dave Ramsey’s advice, I would not have been able to pursue my chosen career, and to be honest, I’m not good at anything else. So I would have probably ended up in a $50-100k job, if I was lucky. But the debt is long gone now, and my earnings continue on.

As for the demographic I was referring to as Dave Ramsey’s target audience, it’s obviously those with debt who are having a hard time paying it off with the income they have available. The rest of what you said are your thoughts, not mine. It doesn’t matter if the person’s income is $20k/year or $2M/year – if it’s insufficient to pay off the debt, there’s a problem (and perhaps a need for Dave Ramsey’s advice).

Do I look up to ther person making $1M/year who has a negative net worth? No, I don’t look up to that person nor do I look down at that person.

I have no debt of any kind, but still know what it’s like to have few resources to get by with. I’ve ‘been there, done that’. I feel empathy for folks in that position, and if Dave Ramsey’s ‘teachings’ helps them, that’s great! But the advice is not good for all. Some of Dave Ramsey’s black and white opinions of credit cards (and perhaps debt in general) are wrong for many, many folks. Just because a person uses credit cards does not mean they are in debt. It is only debt if the person is using the cards to delay payment.
578
Jeff Says:
June 25th, 2010 at 1:20 pm
The student loans were necessary to get me through college, med school, my internship, residency, and fellowship. During the latter years I earned a very small salary. If I had taken Dave Ramsey’s advice, I would not have been able to pursue my chosen career, and to be honest, I’m not good at anything else.
_____________
Dave’s advice is for 95% of Americans. Let’s face it, medical school is very expensive and the person has to go through a lot. You had a large amount of debt that wasn’t getting paid but you managed to get through to the end goal. But there are plenty of doctors that don’t pay off the debt before buying the big house and stay in debt for years. Earning 700K puts you statistically in the upper 2% of Americans. I agree this isn’t Dave’s audience and I bet very few listen to the show. Many people end up dropping out of medical school with huge debt then have no way to pay it off. Dave really goes after the people that go to private school to earn a degree where you can’t get a decent job and come out with 100K worth of debt. Or the law school student that wants to do pro bono work making 40K a year with 120K in student loan debt. I would be easier to delay law schools and work while going to law school than medical school since residency and all of that consumes your life.
Based on Dave’s callers, they are average to above average earners that get sucked into the consumer culture. Doctors and Lawyers have called in and are 400K in debt on school loans and go out and buy a house. Technically using a credit card is debt because you have to pay it back at a future time. Those that can pay off the balance every month are a small amount of the population and those are the same responsible people that get screwed by the irresponsible. You and I are part of the responsible crowd, but I know plenty of people in my income bracket that still don’t have a clue and lease cars and don’t have a financial plan.
579
Rex Says:
July 1st, 2010 at 1:20 am
Great article that is very thorough and simple. In the end I still agree with Dave Ramsey.

“Debt is the symptom, not the problem”

Behavior is what you’re trying to save. Though in the case of paying the higher interest is mathematically better if you have 100% self control, those in extensive debt do not have 100% self control.

The Ramsey method addresses the behavior better than than the higher interest approach.
580
DisciplineMatters Says:
July 2nd, 2010 at 9:37 am
Ever see that movie where Richard Pryor is about to inherit a huge amount of money? But he has to spend 30 million in 30 days and have nothing to show for it?

Dave Ramsey’s method, while maybe costing a wee bit more “mathmatically” is working you through a debt removal discipline that makes you HATE debt. Makes you never want to have to do that process again. Provides the small victories first to make sure people can stick with it rather than fall under the spell of living on credit cards.

As with all discipline – it doesn’t feel good, creating the new habits is a hard process… but the end result is very well worth the small amount of extra cash – a lesson well worth the money!
581
Don Says:
July 8th, 2010 at 4:51 pm
Hey,…like comments but need to know if using debit card is as safe as credit cards? I keep a sizable amount in checking account to pay bills, ect.
582
Chris Says:
July 8th, 2010 at 5:16 pm
Don, contrary to what Dave Ramsey will say, no it is not. When using a debit card, you have given up all your power if you are not satisfied with the product/service you paid for. Also, if it’s stolen, the money is gone from your bank account until you can convince the bank that you’re not the one who withdrew the money.

There was the story of a man who visited a tourist shop on a Caribbean island, and bought a t-shirt for his wife. The price in US$ was something like $15. He paid for it with a debit card. After he got home, he realized the charge came through with the local currency applied, which was around 2100 whatevers, and $2100 was withdrawn from his account. The man contacted the shop owner, the police where he lives, the police where the shop is, and his bank. He was unable to recover the funds, and his wife now owns a very expensive t-shirt! Now this story would have had a completely different ending had this man used a credit card.

I don’t even have a debit card. It’s credit cards all the way for me!
583
Nate Says:
July 20th, 2010 at 11:45 pm
I agree with you financially speaking, but from a motivational standpoint, it is really hard to feel like you’re making a dent when your balance on your highest interest rate (7% private student loan) is $24000, and your balance on your lowest interest rate loan (4%) is $3700. Try feeling like you’re putting a dent in your debt when it’s $24000, and accruing $100 in interest every paycheck. It is much more intrinsically pleasing to slap $1000 at your little loan for 4 months, and then have a little celebration (and reinforcement) before tackling the big, takes-2-years-to-pay-off $24000 loan.
584
kelly Says:
July 22nd, 2010 at 11:16 pm
I guess to some it up, if Ramsey is bad at math, I would like to compare his bank account with yours.
585
Anonymouse Says:
July 23rd, 2010 at 1:43 pm
People get into debt because they adopt an innumerate, feel-good approach to spending. Dave Ramsey advocates an innumerate, feel-good approach to debt management. You can see it here in the comments: The Ramsey followers don’t see the value of paying off debt one month early, or saving $600 over the course of several years. They dismiss it in the face of the good feelings they get from knocking off smaller debts first. Their behavior may have changed, but their thinking is still pathological.
586
Jeff Says:
July 26th, 2010 at 6:29 pm
I see where the mathematics that this guy is writing about where pay off the high interest loans first is a good way on paying off debt but the Dave Ramesy affect works better due to the boost and excitement that a person gets when there paying off the smallest debt first. If we was all doing math in the first place we would not be geting into this debt mess…hmmm something to think about.
587
Jeff Says:
July 26th, 2010 at 6:57 pm
In the reference to the comment that Chris made on July 8th about not having the protection in the debt card as you would on a credit card. Go to Visa and Mastercard.com… you would see in both sites that the visa and mastercard debit cards offers the same protection as the reg. credit card offers. Credit cards however if you call the fraud department and report an over charge and or fraud, they treat you like your trying to steal from them. As far as a debit card from the bank lease my bank they have no problem refunding the money back into my account within 24 hours. I have deal with this in the pass. Also i travel all over the states and mexico and have far less problems with a debit card…Credit cards are like snakes, play with them enough you will get bitt
588
Brandon Says:
July 30th, 2010 at 12:50 pm
How many people have you gotten motivated to get out of Debt using the method you speak of??? Small victories and baby steps is what I needed… I looking at the BIG PICTURE…

I agree with Dave’s more because one small victory gives you more hope to climbing out of debt.
589
Dano Says:
August 2nd, 2010 at 1:46 pm
Technically your method is better . . . but if you are such a math genius then you would quickly analyze that getting into debt with credit cards is just plain stupid! Dave’s method involves knocking off small debts first to gain some momentum and then using that momentum to attack and knock off the big debts. It is a tried and proven method and has worked great for me.
590
dan Says:
August 10th, 2010 at 12:01 am
I really dont understand how people like this chris guy up top ever come up with the ideas they have. If you spent as much time dealing with your own life maybe you would become something and not just a broke man with ideas that only the rest of the broke americans would go along with. On the whole debt card or credit card issue first off ANYONE will spend more if its on credit. And for the issue of the withdraw that guys bank must have been as dumb as you because i have never had a bank that would not call me if this amount had been requested for one transaction at a store
591
Nick Says:
August 11th, 2010 at 11:32 pm
I believe the technical answer to your question is that Visa protects you at least as long as you don’t do a pin transaction, which seems to mean that if they ask “debit or credit” you say “credit” even if you are using a debit card – here is more info for you – http://usa.visa.com/personal/s.....l#anchor_2

Accorind to Visa:
Use your Visa credit or debit card to make purchases at millions of locations. Visa will always protect you from unauthorized use.

But the mechanics of the “hold” and other debit card issues may be an issue. I would try to budget so that you’re never at the point where you’re only a few hundred dollars from disaster – hold or not.
592
Clay Says:
August 12th, 2010 at 8:13 am
If you was this smart to figure out all these ratios rates and which to pay first you wouldn’t have gone into debt in the first place. Stick to the smallest balance to the largest. I did it and it works just fine and very quick.
593
Nick Says:
August 12th, 2010 at 9:39 am
I’m sure someone mentioned it in the hundreds of comments before, but Dave Ramsey admits that his math doesn’t pay it off the fastest or cheapest. But it’s not about the math to him (I think he says something like it’s only 5% math – maybe 20% – something small). But it’s about changing behavior and having small, motivational wins along the way.

In the end, it’s “personal” finance. Do what will work for you. Sometimes trying to save 1/2% on $5,000 over the course of a year by listing them highest interest rate first derails you and you end up paying more overall because you don’t pay them as fast. Do what works for you. In the end, unless the differences in interest is huge (or the amounts can’t be paid within a few years) it’s only going to make a slight difference in time and money. Getting out of debt is the important part.

No need to overthink it. If you need the motivation do smallest amount to largest. If not, maybe the highest interest rate is right for you.
594
Jeff Says:
August 12th, 2010 at 9:43 am
If you are using a debit card and use credit vs debit, the ONLY advantage you might gain by float is the fact the the majority of credit transactions are batched out at the end of the day and sent to the bank. So if you use the debit card as a credit on a Friday, you might not see the charge show up until Monday or Tuesday, but if your balances are that low, you still run a risk of overdrawing the account because you won’t see the charge show up as pending. I see debit charges almost immediately.
595
DAVE B. Says:
August 14th, 2010 at 6:02 pm
DAVE RAMSEY IS ABOUT MOMENTUM IN SNOWBALL….WEEEEE PAID OFF A DEBT WEEEEE PAID OFF ANOTHER…. THIS WAY U DONT GET DISCOURAGED
596
DAVE B. Says:
August 14th, 2010 at 6:03 pm
IF U ACTUALLY READ THE BOOK OR LISTENED TO HIS RADIO PROGRAM….DAVE RAMSEY IS ABOUT MOMENTUM IN SNOWBALL….WEEEEE PAID OFF A DEBT WEEEEE PAID OFF ANOTHER…. THIS WAY U DONT GET DISCOURAGED
597
Matt K. Says:
August 22nd, 2010 at 3:51 pm
If you really listen to Dave Ramsey there is flexibility in his plan. I have heard Dave on his radio program discussing paying off the higher interest rate first if you want to. I am assuming thats why he calls is program an outline, you can deviate from it to suit you needs.
598
jody Says:
August 25th, 2010 at 12:05 pm
Dave knows that it’s more about behavior than math, that the process is 90% mental. That’s why Dave’s teaching is effective and now very popular while you apparently are…not.
599
Jeff Says:
August 25th, 2010 at 12:14 pm
As long as you are moving down the path of getting debt free, the difference in interest is probably not enough to matter. Credit card interest is high, but having a low interest rate on $50,000 is probably worse than having a 29% rate on $5,000. Personally, I would rather pay off the smallest and get rid of it than to screw around with a bunch of bills.
600
Brett Says:
September 2nd, 2010 at 4:17 pm
Hilarious to read so many ridiculous comments.

Chris, the things you are saying in this forum are completely absurd.

“If I had taken Dave Ramsey’s advice, I would not have been able to pursue my chosen career, and to be honest, I’m not good at anything else. So I would have probably ended up in a $50-100k job, if I was lucky.”

Dave Ramsey doesn’t tell aspiring doctors or lawyers to choose another career if they can’t pay for school with cash. He has always made it very clear that if you are going to spend a lot of money on education you better be earning a high income after school.

As for credit cards, the bottom line is that no one has ever gotten rich using credit cards. Rich people might use credit cards, but the cards didn’t make them rich. I love how people like you really think they have it figured out. Have fun with your little cashback bonuses and a free airline flight once every 2 years.

“There was the story of a man who visited a tourist shop on a Caribbean island, and bought a t-shirt for his wife. The price in US$ was something like $15. He paid for it with a debit card. After he got home, he realized the charge came through with the local currency applied, which was around 2100 whatevers, and $2100 was withdrawn from his account. The man contacted the shop owner, the police where he lives, the police where the shop is, and his bank. He was unable to recover the funds, and his wife now owns a very expensive t-shirt! Now this story would have had a completely different ending had this man used a credit card.”

I love that you dig up some wacky anecdote about someone getting shafted by their debit card with a $2000 tshirt purchase. Right, Chris. Screwing people over is one of the main drivers of the credit card business model. The fact that you try to argue that credit cards give you so much better protection is laughable.

“When I am spending my money, I prefer to be the one with the power.”

Our sophisticated financial hero Chris strikes again. Yes, borrowing money puts you in a position of “power”.

Seriously, Chris. If you have no idea what you are talking about it’s better to just be quiet.

What an idiot.

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