And, FCN, love the post. Four years old and people are still commenting. Says something about the passion your readers have, whether they be for or against the issue.

I can see paying the smaller balances first for maximum positive psychological effect though. Pick a system that you like and stick to it.

Thanks for the opportunity to chime in.

I forgot to say that I don’t really care what the interest rate was, I’m more concerned about the cost of the debt and its effect on my personal finances.

I am happy that you are on your way to being debt free too! We have 2 paid off cars, but it will be awesome when we can walk in and pay cash for a car we saved for!! Way to go Hols and may God bless you!!

If you are thats great. If you’re not thats great too. A christian, buddhist, jew, or athiest can all get into debt and need help.

I just didn’t want non-christians to think this program isn’t for them.

PS I’ve paid off 3 of my 4 snoball debts in the first month of working it. I sold my precious jeep and am driving my paid for E250 van around till the debt is gone. Later I plan on buying another jeep with cash.

God speed on your road to becoming debt free! I think Dave Ramsey is great. It helped us put our financial lives back into perspective and helped us see the light at the end of the tunnel! It is exciting and almost becomes addictive! We are the same way we have been so excited every time we pay off a debt! Keep strong and don’t let your friends put too much pressure on you! They don’t understand and sometimes we can look a little crazy in the worlds eyes which is fine with me, I’d rather be a fool for Christ!!

And most people have many more than three bills like in your example and most of them are credit cards or personal loans, like 5 to 10 credit cards, a couple of personal loans, student loans, car payments and a mortgage. Sure paying the highest interest rates seems the smartest, however you have to have be extremely patient, have high self control, and be very self disciplined.

Also we tithe 10% of our income to our church. You try it and I promise if you do, God will come through every time! He makes ways where there seem to be no ways!!

Thank you! I wasn’t sure how debt management plans were viewed on here, and was hoping my comment would be well received. It worked really well for us.

You are absolutely correct, and that is one thing I neglected to mention. Saving is essential, and we did do it (and do now). We just made so little at the time, that we could save just a little each month, in spite of the fact that we did very little “extra” stuff like going out to eat or to the movies.

So in spite of the fact that we were saving what we could, when my husband had emergency surgery, the bill for that looked at our savings account and laughed at it. As we tried to pay on the medical bill (which I believe stopped our saving), our car needed transmission work. We did most car repairs ourselves, to save money, but we couldn’t do transmission. So we had to charge it, because they don’t do $50/month payment plans like the hospital did.

We did make a mistake in starting up a little ministry without saving for it first. That was an unnecessary, voluntary debt which we look back on with wiser eyes.

We kept an expense diary, and I frequently wrote out our bills and such to keep track of our money. We could have done some things to improve (like wait for the startup money for that ministry), but we only made about $800 per month at the time, and you can do only so much saving on that, though we could have done better.

Thank you for pointing out that aspect, because I did neglect it.

Good for you working out your debt through a Debt Management Plan! I think those are great ways to help people get debts paid off, and at usually lower interest than the credit card companies are willing to offer.

A note about debts being involuntary: I agree, to a certain extent. The reason: you should be saving/budgeting for these expenses. The number one reason why most people get into debt: they have little to no savings! The recommended amount of savings for this type of economy is 3-6 months of your monthly living expenses. And, when we talk expenses, we arent just talking mortgage, utilities, food, car payment, clothing, and isurance. There is also: car repairs to plan for ( I save $75/month for this specific expenses) medical expenses ( I can pay up to $1500 out of ocket per year, and so save $125/month), savings (this is OUTSIDE other expenses, and for me, is an additional $100/month), etc etc. So, in a way, if you start a savings now to plan for expenses in the future, you can STAY OUT OF DEBT.

Which brings me to the point to say…. most debt IS voluntary! is you cannot afford to save for your expenses that can arise each month, then you need to rework your budget so you can. Obviously, there are terrible things that you sometimes do not have enough saved for (i.e. a house fire that happened to me 10 years ago. I should have insured myself better, but instead, had to dish out an addl $15,000 for repairs not covered by insurance, but only had $10,000 in savings).

DO A MONTHLY BUDGET PLANNING FOR YOUR EXPENSES. If you can do this and still have alittle money left over, you are in a fairly good financial shape.

The idea is a lot like Dave Ramsey’s, paying off the smallest bill first, then rolling that over onto the next smallest. In addition, though, they negotiated with the credit card companies and got our interest rates dropped to 6% and 6.5%, and our monthly payments reduced to something we could handle. With the hospital bill, we couldn’t handle it all anymore.

We sent Genus the total amount for all the bills each month, and they disbursed it. We had to send two payments the first time, and that was extremely difficult, but we did it. We stuck with the plan, and, even with the comparatively small amount we paid each month because of how little we made, we paid off all those bills in less than seven years.

We certainly paid more in interest than we could have, but we could not make much in payments, so, for us, paying off from smallest to largest was what we could do. It was such a satisfying day when the last one was paid off.

Since our experience, my brother and my mother both used their debt management program, and paid their debt off even faster than we did. It worked well for us all, though you could certainly do it on your own.

It is good to remember when dealing with others that not all debt is voluntary. Medical and auto repair are two good examples. I mention that only because I saw a number of people talking about those in debt as being bad at math… it isn’t always that way.

Sounds like we don’t really disagree that much at all.

And as to the first paragraph of your first post,

” The thing you need to ask is, “What if it all falls apart?” What’s your back up plan when, let’s say, the housing market rebounds, congress offers $15k to new home buyers and your vacancy rate doubles? What happens if an earthquake (even if it hasn’t happened in your area in 100 years) cracks a foundation making a house uninhabitable and un-covered by insurance.
…being open minded and listening to others with experience can be extremely valuable.”

I absolutely agree that this is true. If you are going to decide to take a risk, take it with as clear vision as possible and also learn from the experience of those who have gone before you and may know some of the pitfalls. Knowing the pitfalls might not mean that you stop with your plans, but might mean that you plan differently for different contingencies or are at least aware of them.

But now we are far far off the topic of the debt snowball !

Best wishes

Best wishes

I’ve made mistakes – not with zeroes on the end – and now have a family. Can you make a killing with risks? Yes. Are there varying levels of risk? Yes. Risk is inherent to any worthwhile venture and those who live by the sword die by the sword. The foundation cracking example was a true story and the investor, had he not over-leveraged his investment, would’ve been in a much better position to ride out the storm. Climates change. Congress passes another 1986 Tax Act (which even tripped up RE guru Robert Allen) and the proverbial bottom falls out.

In short – to each their own. Security is an illusion, but ignorance is bliss. Risk without accountability caused this mess and, “As a dog returns to its vomit, so a fool repeats his folly.” Proverbs 26:11 (ie – we’ll see this all happen again unless people take personal responsibility for their financial health.)

Let’s agree to disagree ever so slightly.

In particular, one guy calculated exactly how much he wanted to make, then stopped at that figure (this was during the 80s real estate boom). Another guy I know in town owns one commercial building and stopped there because that’s all he needed. He does other stuff with his time now.

If you don’t have a set goal in mind then you don’t know where to stop.

How I do it is figure out how much I would need in order to take living expenses out for 40 years. Take the amount you need to have in today’s dollars every year and divide by 0.03 and that is the amount you will need (in today’s dollars).

Deciding on a goal and then meeting it, then switching to a conservative low-to-no debt profile (conservation of assets) makes a lot of sense.

Personal finance writers do well to focus on the largest demographic: those who work at a job for a living and are in credit card debt, usually for silly, unnecessary, and nonremunerative things. For them, truly, debt is not a tool.

For someone with a solid business plan and successes behind them, debt and leverage can have a role to play and each business owner would do well to look at the level of debt and risk they are taking.

Offtopic in response to JC: I think you are right in the outline, as it is true you can’t predict the future and having debt in your business is inherently riskier than not having debt, but as you yourself write, that’s the gamble you take when you’re young and trying to build up some scratch on your own.

As to the housing market getting a rebound to anything like the levels that existed in 2008, not in our lifetime. And the time for Congress to be handing money out is long past, I doubt that will happen again as (a) the money is not there and (b) people have adjusted to the crisis and the crisis is the new normal, so there is not enough political pressure to make such a move worthwhile.

I don’t disagree with your comment at all in its essence, because it is true that many have crashed and burned in business due to debt, but then again others have succeeded. I think posters like Matt, after they have considered the risk/reward profile, are just as justified to keep doing what they are doing as in stopping just for the sake of not having debt. Business debt and personal debt have the same risk profile, but the upside for business debt can be high while there is no upside for personal debt.

I’m not going to say all debt is dumb and I understand the Kiosaki model. But being open minded and listening to others with experience can be extremely valuable.

The tendency for people in your situation, psychologically, is to think things will remain status-quo or improve. My own company, which has leveraged it’s cash-flow responsibly, has been very conservative in it’s growth model. We could not have predicted the worst economic decline since the 1930s and are seeing our partners and bank covenants dictate our course of action instead of having the flexibility to act as we wish. This is a major downfall to having leveraged debt – it can limit you. Essentially, this kind of thinking caused this downturn.

I wish you continued success, but DR did what you are doing. He did very well and made thousands of RE transactions. I think it would be prudent to consider his complete perspective before dimissing it (ie – get his book from the library and actually reading it)

Ramsey’s method does keep you motivated, but it will require a lot of motivation to work with blunted tools. Hope you have motivation to spare. Keep your axe, I’ll keep the chainsaw. Debt can be a tool, and I realize that chainsaw accidents happen everyday. Play it smart and safe, but use good tools.

Well if you listen to Warren he was telling everyone to get out of the market nack in the fall of 2008.

But as usual, Warren never follows his owns words. He then went on a buying spree. He spent some 5 plus Billion buying into the “9%” market. Do you suppose that Warren forgot to mention that when the market for the last 10X in a row, recovers, it does it at an average of 36% the first year, 25% plus the second and 20% the third year? Or do you supposed, he as he always does, gives bad advice and then does the opposite? You don’t suppose he wanted you fools to sell out cheap so he could buy and get rich off your mistakes of selling?

Warren is quoted for saying many times, when the Market is doing well you get make lots of money. When the market crashes, you get wealthy!
Dave is right, right now stocks are on sale. By the way, I have many stock which were back by April 2009. Back to where they were before they fell. But since then 7 funds have had 31%+ gains and 2 have done 42% range….2 which I got out of, GNMA’s are doing 2% or less.

By the way, Warren when he said 9% lied. It is a fact the market has averaged 11.84% since it started, those are facts. It does not matter who says what, the numbers say 11.84% average.

Daves plan does work better than anything, it is 95% behavior, 5% math. If math is your answer, then why are you in debt?

I do highly recommend the DR (snowball) at the beginning until people have things under control and have seen the light.

Unfortunate that the author didn’t read or listen to Dave, who freely admits that the Snowball is not the best mathematically.

The author also doesn’t acknowledge that most people can actually pay off that little one quite quickly. Most people can scratch together $500-$1000 to pay off their little Kohl’s card or something like that. Then, boom, one down. Another little victory.

What the author also misses is that people got in debt typically because they are undisciplined (along with all of the other factors that lead to out of control debt). It’s the DISCIPLINE that matters, not the MATH.

I’ve been working my snowball for 5 months – the way Dave suggests. I know I’ll end up paying $632 more spread out over an extra 3 months by not going with the high interest first. But guess what – I’ve got 2 of the 5 credit cards paid off! I’ve also paid off my medical bills and a small personal loan. So, there. Take that you mathematical nerds! They’re called Baby Steps for a reason.

I know the snowball has also helped me keep from getting depressed about the amount I owe as it spaces out some small wins so I dont have to wait years for my first payoff. Thats important when you are looking at 3-4 years to pay off.

The first diet is like the “High-Interest” payoff plan – it will payoff big (in the end), but only if you can stick with it all the way to the end.

The second diet is like the DR plan – doesn’t payoff as big, but has nearly immediate positive feedback, which helps people stick with it…

In Nickel’s example, you have a solid gain with the DR plan in 9 months (paid off car), whereas with the “high-interest” first plan, you haven’t changed anything financially until month 20 (though it is a big payoff at month 20 with two debts eliminated simultaneously).

But for those who can stick with it, more power to you. Good luck!

For me, the Dave Ramsey method gave me a light at the end of the tunnel. Before I was just standing in the dark.

I’m not a heavily religious person or a cult person. Just a small business owner who got stuck in the same credit crunch as many others. I don’t want to ruin my good name by filing bankrupcy or not paying my bills. This method gave me a road map out. Any map when you’re lost is better than none.

So could I save some money tring another plan? Probably. Would I stick to it? Maybe?

The problems at GSCs, and the big banks where failures in their risk models — it was not a failure in math, but in how they chose to employ it.

The DR plan (actually the “automatic millionaire” plan) is superior in increasing cashflow and reducing risk in the shortest amount of time for people with debt up-to-their-eyeballs. So, if that is the goal then go with it.

If the goal is to get out of debt while spending the absolute minimal amount of money to do it (without regards to risk, cashflow, and psychology), then use the “highest-interest” first method.

The extra “cost” of the DR/AM plan is that you will pay extra money in interest, but for the value of reducing risk and increasing (monthly) cashflow, as well as the psychology boost you get when you eliminate small debts. This actually helps people stick to the plan.

Perhaps the best strategy is to use both plans: use the DR (AM) plan at the beginning until cashflow and risk are at better levels (so you can sleep at night), then switch to the “highest-interest” plan later into the debt-payoff journey (to save some extra money).

You need to pick the goal first, then employ the strategy (math) that optimizes the goal you pick. Neither plan is ‘correct’ or ‘better’ than the other, except in the view of the goal it is trying to accomplish.

Given that dept-payoff is only one step (baby step #2) in the total DR plan (after saving $1k in an emergency fund), you need to understand everything he is talking about to see that his plan is truly attacking the risk-reduction and cashflow problems that people have with severe amounts of debt. So his baby step #2 is superior for what he is trying to get people to accomplish. DR absolutely understands the math here, but he specifically designed his plan after hearing about how many of his listeners were failing to reach goals while employing the “higher interest” plan (which he used to trumpet).

Simple put, Interest rates are not what has made you broke, or kept you broke. Pay the smallest debt first, forget the interest. Do as Dave recommends. Each time you pay off a debt you see the end of the tunnel brighter.

If you think interest rates are the problem, you will always be a slave to you debt. Your bad habits and math are what makes you broke and keeps you broke.

Math is math, but when math runs head long into life. Math falls apart every time. Can you say, Fannie Mae, Freddie Mac, AIG, Enron, Wachovia, Washington Mutual? The list is endless. They had lot’s of math people. Every one of them was wrong as can be.

Look at it this way, you have tried everything you can think of and are still paying on debt.

Now try doing Dave’s method. Hey after you do his plan and are debt free. If you don’t like it, you can go right back into debt in 20 minutes!

Even deeper as you have paid off your debts and the credit industry is waiting to give you more and more Pain, I mean debt! You can be a slave again in no time!

It is your choice, but interest rates have NOTHING to do with your debt! It is you willingness to be in DEBT!

But, if the goal is to reduce risk and increase cashflow the fastest — the other plans win. You can see this in your example where the first debt (car loan) is knocked out in 9 months instead of 20. That is 11 months of reduced risk ($275 increase in cashflow per month and car can’t get repo’d).

It just depends on what the goal is, then picking the plan that meets it the best…

I do, however, agree that people should follow whichever one makes the most sense to them, as they’re more likely to stick to it if it resonates with them.

I disagree with many of Ramsey’s theories, but did want to dispell the myth that either rule of thumb is always better to reduce ones debt.

The value in Dave’s approach (mathematically), is that it reduces risk by increasing cashflow the fastest of all methods.

The other method of paying highest interest debt first will result in less total dollars spent in interest, but it does not decrease risk and increase cashflow as fast as Dave’s plan.

If you don’t have cashflow problems, then go with the “Highest Interest” plan, if you have debt up-to-your-eyeballs, use Dave’s plan.

And your approach to debt is just as simple:
*stop using the cards and pay them down one by one, lowest balance to highest balance first.”

You’ve stepped out of the credit card mind-meld into your own reality, where money is what you have in the bank and has a green color, and anything else (credit lines, the ability to buy now and pay later–and later and later–becomes “the old way and the wrong way.”

We have tried so many methods to get out of debt..and the benefit of Dave’s straight talk and emotion-based approach is so helpful! We finally got the courage to sell our 2004 Lincoln Navigator and buy a 1999 Jeep Cherokee for $3600 just to jump start our snowball.

All we keep saying is “We’re not living here” meaning..we aren’t going to be broke forever!

Sure in the long run people may not be saving a ton of money, but the point is that without the debt snowball and total money makeover plan, a lot of those people would still be in debt… likely forever.

Paying off debt is exciting! It’s a rush. It makes them want to do it more often! It makes them want to stay debt free once they begin to taste financial freedom. IMO this is worth more than the cash you would save from paying off the highest interest bill first.

(Dave says, in sophisticated voice) “But Dave, isn’t it mathmatically correct to pay down the debt with the highest interest rate?”
(Dave replies, in normal voice) “Well yes it is, but if you were good at math you wouldn’t be in debt. I want you to pay down your lowest debt … for instant gratification so you can keep the momentum and gazelle like intensity to attack the rest of your debt.”

So I think we can all be friends, he’s not disagreeing with you or asserting his method is the most mathmatically sound, its more about motivation.
Thanks,
Kristen

Dave’s plan is not the most efficient, but it is efficient enough. His plan is an *effective* way of paying off your debt, and effectiveness, not extreme efficiency per se, is what matters most on pressing tasks.