What I Think of Dave Ramsey
I get asked about Dave Ramsey a lot. Several people come into the credit union spouting the words of Dave Ramsey and then ask if we know who he is. Well, any banker worth their salt should know who he is. He’s only made our lives more difficult when it comes to educating people about the proper way to handle debt. But, recent conversations have prompted me to address the matter of Dave Ramsey and the debt snowball on this forum, so here goes:
My opinion of Dave Ramsey is that he’s horrible with math and probably not so good at psychology, either.
I’ve posted before on the fact that I don’t like the snowball method. I understand the reason for it existing, but I don’t think it makes good financial sense to teach people a method that costs them more money just because it may make them feel better.
I like the idea of taking things slow to achieve financial success, which is the basis of his 7-step plan; however, I don’t agree with some of his methodology. By the way, just in case anyone isn’t familiar with Dave Ramsey, he’s the guy that invented the debt snowball method, i.e. you pay your debt down in order from the smallest amount to the largest irregardless of interest rate. He has his own radio show and he’s also got a television show somewhere on network TV, but I’ve never seen it. His 7-step process looks like this:
- $1000 to start an emergency fund
- Pay off all debt (except the home) using the debt snowball
- Build 3-6 months of expenses in savings
- Invest 15% of household income into Roth IRAs and pre-tax retirement accounts
- College funding for children
- Pay off home early
- Build wealth by investing
First and foremost, I’m a firm believer in paying yourself first and continuing to do so even when money’s a little tight. If you don’t, you’ll never find the money to save. Likewise, if you don’t have an emergency fund with 3-6 months expenses in savings, you won’t be making any payments on anything in the event something happens with your job. With that said, one and three should be combined.
I’ve already mentioned that I don’t like the debt snowball method, so for me Ramsey’s number two is ridiculous. As a financial “expert,” he should be teaching people the right way to manage their debts and offer advice on how to overcome their discouragement with regard to paying off those high interest debts. He shouldn’t be offering easy-out solutions that don’t teach people the value of working to pay down their debts. Beyond that, I’m just opposed to giving financial advice that costs people more money.
I think what people need to do is sit down and work a side by side comparison of the debt snowball and the traditional methods. Compare the time it takes to pay everything off and the amount of money spent at the end. Once they see the numbers in black and white, I think most people will fully begin to understand why so many financial experts are against the debt snowball. However, I realize that for some, this is the only method they’ll use and there’s no changing their minds. As you wish, but you’re still paying more money than you should and I imagine there’s other things you’d like to be doing with that money!
Investing into pre-tax retirement accounts and Roth IRAs is an important step for taking care of your retirement needs, so I’m good with number four. Your retirement is up to you as no one else will take care of it. I will add that this should not be neglected while you’re paying down your debts. And to finish off the list, the last three are fine with me as well.
So that makes my list a six-step process that looks like this:
- Build a savings account with 3-6 months worth of expenses
- Pay off all debt (except the home) using the traditional method
- Invest 15% of household income into Roth IRAs and pre-tax retirement accounts – with the caveat that this is not neglected at any point in the overall process
- College funding for children
- Pay off home early
- Build wealth by investing – be sure to diversify your portfolio
I was talking to a member today who was a huge fan of Dave Ramsey. He asked me if I knew who he was and I said yes. He went on about how his advice was great and he’s working to pay off all of his debts, etc. He was even opening an account for his emergency fund and dropped about three months worth of expenses in it. Then he asked what I thought…Something you have to understand about me is that I don’t like to sugarcoat stuff, especially when it comes to finances. I’m a bit like Suze Orman in that I tell it like it is. People need to hear the truth.
So, I told the member that I’m not a fan of Ramsey’s, but that I was glad he was opening the savings account. He asked my why I didn’t like Ramsey. I told him everything that I’ve said here and then I told him I would show him. So we sat down with his debts and worked the numbers both ways. If he did the debt snowball method it would take him 29 months to pay back his debts and it would cost him $8945 in finance charges. If he paid his debts the traditional method it would take him 27 months and only cost him $7988. That’s a difference of $957. So, to me it’s clearly obvious that the traditional method was better. I don’t think he’d ever considered it that way before because he seemed blown away. We talked about some other options to shorten the time span and save even more on the interest all of which he declined, but at least he walked away with better options. And that’s what a financial expert should do – they give you options that help save you time and money. They offer advice on areas you could improve. They DO NOT give you easy-out solutions that cost you more money in the long run!
Ok, so let’s have some friendly bipartisan debate here:
For those who side with Ramsey, why do you like the debt snowball method? For those who agree with me, what’s your biggest objection to it?
Photo by marklarson
Related posts:
- OMG, I Agree with Dave Ramsey… In This Case
- The Debt Snowball Method: A Primer
- Bi-Monthly Credit Card Payments
- 10 Tips for Seniors to Get Out of Debt
- Justifying 3-6 Months of Expenses in Savings
I think the biggest issue is everyone here is stuck on the fact that Dave Ramsey’s method is simply about making the person feel good, but it’s not entirely. It also helps reduce one’s monthly finicial obligation which allows for a bit more flexability when needed. For families living paycheck to paycheck, especially in the lower income brackets, this can be a god send in times of crisis. Having never read his book, nor listen to anything he preaches, life and trail and error pretty much brought me around to his method anyway.
In my case, my debt actually came from trying the traditional methods when my debt was much more managable, but as each family crisis came up, this method left no wiggle room to deal with and cope. Hence the vicious cycle we got stuck in. After a suprise jobloss of both me and my husband within 3 months of each other, which came 6 months AFTER the birth of our first child. Having to relocate(paid by us) and take major paycuts, we found ourselves in trouble. For 6 years we struggled to make ends met and climb out of the hole using the traditional method. Each time issues arose, it just made matters worse as our monthly obligations never decreased and each emergency usually tackled on more debt because of it.
Now for the past 2 years, we’ve used the smallest balance method instead of the largest intrest method and managed to reduce our monthly obligations by over $500 and are on track to be debt free by the end of the year. Something that the traditional methong never got us close to doing, not for the fact that we quit trying, simply that it didn’t do enough to help our overall finacial situation, so we were constantly sliding backwards when ever problems came up.
Being rid of the $500 in bills, meant we were much less stressed out by the rising gas and food prices. Nor are we going to be hard pressed to deal with the fact that my husband’s job may require a relocation in the next couple of month’s which may mean a new job for me which could very well mean a lower overall income. I can now afford up to a $10,000 pay cut and still be able to handle debt repayment. Had we not gone this route, this sort of change would have at least cause a halt to the debt repayment.. but possibly adding to the debt as we struggled to get by again.
The one thing I’ll note, is that I do agree with Kristy on the continuing to save while repaying debt. $1000 emergency fund doesn’t go very far anymore, especially when it’s a family with children involved. One car repair or ER visit can completely wipe that out and they happen more often then you’d think. We opted to continually contribute to ours while working on the debt and while it may have slowed us down, it has ensured that we were able to stick with the plan no matter what came up.
I bet this thread will last forever lol
I love love everything that NtJs spoke on. I have been on the Dave plan for 6 months. I really don’t want to get into a debate about math but I can tell you the other things that being on the plan has done for my life.
1. GIVING – I have been on the TMMO for 6 months and since I have been able to manage my finances I have been able to give to people when in need. Before I couldn’t rub two pennies together let alone give someone a helping hand. WITHOUT NEEDING IT BACK
2. EXCITEMENT ABOUT LIFE – I was in a deep deep depression almost on the verge of suicide. I was so overwhelmed at the age of 25 about life and money that I just didn’t want to be on earth anymore. Its a sad fact for young adults so please don’t discount that as just (my situation). Now that I have a hold on my finances I see an extremly bright future for myself and I am far far away from ever thinking about taking my own life.
3. MORE TIME WITH FAMILY AND FRIENDS – again I used to be stressed out. I didn’t want to be around family or friends, now I spend time with them an they love me more for it to see me doing so well and so happy all the time.
So if you don’t like Dave’s teaching well all can’t be one. Its sooooooo far away from it being about math you all don’t even know.
Dave Ramsey’s math skills are not the issue here. Neither is someone’s “feelings” about money. Dave Ramsey takes the emotion out of money and helps you to get real about it. Yes, he touts “debt free”, using cash and dumping credit cards as a form of spending, but he also explains how married couples and families need to be on board together. Then he goes on to explain doing what works for you personally.
Let’s get “real” here because we all have been encouraged for the past 20 years or more to “buy” everything on credit. Take a look at commercials and marketing campaigns that reach out to our kids, too. Board games are even utilizing credit cards. Living within your means is the basic philosophy I have interpreted from Dave Ramsey. It makes sense!
As for Dave’s debt snowball – well it worked for me and my family! I couldn’t even attempt to do the above author’s first step of building a savings account until I was out of credit card and auto loan debt. Baby step #1 gave us a little bit of financial security while working on Baby step #2. Best of all we worked on this as a family.
Life happens. Jobs are not secure. Skills are. In fact, skills are even marketable enough to help you make money to survive. Why would I want to use my skills to support someone else’s bottom line. I would prefer to use my skills to support my family’s bottom line.
We live in a capitalistic country. We have the freedom of choice here. Do we continue to let others tell us how to make our money, how much money we should make, and then tell us what to do with our money? Or do we listen to people who tell us how to hang on to more of what we earned without any benefit to themselves. Banks, Savings and Loans, Credit Unions, Credit Card Companies, etc. are all in the business of making a profit. As soon as people figure out a way to hang on to a few more of their dollars to do what they want to with it along comes a “new” or “revised” fee structure.
One of the other things Dave Ramsey touts is to “pay it forward”. Does a bank, savings and loan, credit union, credit card company, etc. “pay it forward”? I don’t think so. Unless they can figure out a way take it out of their marketing column on their balance sheet. Where do their marketing dollars come from? Maybe it comes from that “new” or “revised” fee structure?
Go Dave Ramsey!
“One of the other things Dave Ramsey touts is to “pay it forward”. Does a bank, savings and loan, credit union, credit card company, etc. “pay it forward”? I don’t think so. Unless they can figure out a way take it out of their marketing column on their balance sheet. Where do their marketing dollars come from? Maybe it comes from that “new” or “revised” fee structure?”
This paragraph came right after a paragraph where you stated that “We live in a capitalistic country.” Yes we do, which is why banks charge for their services. That is how they make a profit, which in turn gives share holders value. That is how capitalism works. As long as they stay within the legalities of fair lending practices, they charge these fees to make a profit. It also allows investors of various funds to make money. I know that Dave hates those “snakes” at the big, bad banks, but I am sure that a number of his funds contain stock in financial institutions. So those same “snakes” are making him money as well. Again, as you stated, “We live in a capitalistic country.”
But I digress…
The problem with Dave’s method of not saving for retirement before all debt is paid off is that you can never make up time; however, you can make up the extra interest you pay on your debt by saving early. Dave has even suggested stopping your 401(k), which, unless your bills are more than your take home pay, should NOT be done. Here is why:
401(k) is a pre-tax savings plan. This means that more money will go into the plan than the money you would have received after taxes. For example, at my last job I made 90K, and I put 6% in and got a 50% match to my contribution. This means that $231 was put into my 401(k) and $115 was put in by my employer, giving me a total of $346. However, my net take home pay was only $140 less than if I had not contributed. That means that I made $206 right off the bat!
Guess what that means? If two people making that income had 10K in total debt at 12% interest, and person A uses Dave’s method and person B continued to contribute, person A would pay off the debt sooner, but by the time person A starts contributing the extra money, person A will NEVER catch up to person B due to compounding interest. Doesn’t matter how much you put on the interest for the 401(k) or how much you put as the amount the people have to put against the debt. Person A simply gets an extra 140 against debt, and Person A will never catch up to person B…EVER! And even if you subtract the total interest paid from the end retirement calculation, it will still be less.
Another problem I have with Dave is his use of “ELP” financial advisors “with the heart of a teacher.” I looked one of them up in my area, and I wanted to check out his advice. He wanted me to do what Dave suggested with the 4 funds (Value, Growth, International, and Large Cap), but each fund ranged from 1.5 to 2.5% in cost! Ouch! If that doesn’t seem like much, do a search for John Bogle and Tyranny of Compounding Costs. Charts showing the result can be found at http://403bboondoggle.blogspot.com/2007/06/tyranny-of-compounding-costs.html showing that a 2.5% cost on a fund can cost you almost 80% of your wealth! Given Dave’s target audience, he should only suggest low cost index funds (at about .1% cost) for investing long term (index for stocks and bonds).
As Kristy pointed out, Dave’s method (both for debt and investing) cost people money, which is not the role of a financial adviser. If people have an emotional problem with money, they shouldn’t use an emotional solution; instead, they should see money as a tool, no different than a hammer or screwdriver, and should be shown the proper ways to use that tool. Anything else is fiscally irresponsible.
I’m glad to see that it was pointed out that snowballing starts small and gets bigger. What ever view you see it from.
You guys are not to smart. I hear you shouting out numbers and hating on this dave ramsey guy but if you us your head then you will see that if you pay off your small debt first then you will be able to carry the payments up and pay them off quicker. That means less in finance charges. Its ok you guys only have book smarts so it is not your own fault. But keep trying and you might get this whole common since thing just keep trying.
It’s perfectly alright for you to disagree with my views, and those of others. That is what makes a discussion thrive. However, please be respectful. Do not call each other names and do not question someone else’s intelligence. Thank you for your consideration on this.
My wife and I are Ramsey fans. We use his approach. While I haven’t read all of these comments, I’m seeing the same tried and true criticisms. Just a quick take:
1) Dave openly admits the debt snowball is not financially optimal – he says it is behaviorally optimal.
2) I find it really funny people convince themselves it is a flawed approach due to the potential of paying a little more interest. I find it funny because clearly, anyone getting into a high debt scenario isn’t thinking about the cost of interest to begin with? Why should haggling over a few extra interest points matter when the real issue is the USE of debt. That’s why Dave’s plan works well.
OK, this whole ultra anti-debt attitude is pretty messed up. Dave Ramsey won’t even take credit cards on his website. What is wrong with using a credit card (actually, several) to take advantage of cash back rewards and paying it off each month? I get about 1% off my total household expenses doing that, and that adds up to a good chunk of money each year.
Of course no one should be carrying debts that cost 10%+ in interest (in fact, 5% is somewhat high). It’s also a bad plan to run up credit card debt in the first place. However, contributing to your 401k is usually MUCH MORE IMPORTANT than paying off credit cards quickly. Say your company matches 50% up to 6% of your pay. Let’s say you make $4,000 per month. You put $240 (6%) into the 401k and your employer puts in another $120. Let’s say that you earn a reasonable 5% on the account, and you get no raises. Let’s also say you have a credit card debt of $10,000 at 5% (paying a higher rate? get in on a lifetime refinance deal – see Chase for balance transfer offers, or the Advanta 2.99% lifetime offer).
Scenario 1: We forgo the $240 401k contribution and pay the debt with that money in addition to the minimum payment. We pay off the debt in 31 months at a total interest cost of $612. After paying off the debt, we start putting the money in the 401k instead. After 10 years, we have net worth of $38,000 and in 20 years it is $117,000. Not bad!
Scenario 2: We make only minimum payments on the debt while investing the $240 in the 401k. It takes us over 20 years (!) to pay off the debt, and it costs us about $2500 in interest. However, after 10 years our net worth is $53,500 and in 20 years it is $145,000! Hmmm… that’s better!
The problem people get into when they get anti-debt is they forget about the asset side of the balance sheet. Only focusing on the interest costs makes us overlook the value of a company match.
If you believe your job is secure (and you should always UNDERestimate this), your most important priorities should be:
1. Contribute at LEAST enough to your 401k to get your company match (this is almost always a no-brainer).
2. Refinance any credit card debt onto a lifetime balance transfer offer preferably no higher than 5%.
3. Make a budget so you can live within your means. Don’t get into any additional debt through careless spending.
4. Get any free money Uncle Sam will give you with Roth and deductible IRAs.
5. Save at least 3 months of expenses in a high-yield savings account.
6. College funding and general wealth-building investing (so long as you are earning more from this than your debts cost in interest – otherwise pay down those debts).
You simply can’t afford not to take free money – period.
But there is no such thing as free money, Tim.
If you believe you have outsmarted a multi-billion dollar industry which is offering research-tested, statistically tracked loan products to you then you are mistaken. All you are doing is playing with loaded guns.
They know the numbers and know that eventually the probability is very good that you will screw up or they can invent a problem. You are late with a payment or they somehow “accidentally” don’t get the payment. They can change the rules on you pretty much at will and you don’t have much say in it. These are not honest, fair-minded people running these companies. Very easily, that 1% you are craving turns into a negative 2% loss for you.
Why is 1 percent so essential to a budget? Why not just go cash only, drive a little slower to and from work everyday, or buy some store-brand groceries once in a while. There’s your coveted 1 percent savings (probably more) without dealing with slimy credit card companies.
Hey, guess what Masteryourcard dude, I’m debt free including my hose and I am only 26. I used the baby steps: Paid off my car first, then my school loans, then my house (smallest to larges). I make what an average US citizen makes, was not given any inheritance or hand outs. I busted my butt, and my wife and I are free of debt, over $100,000 worth of it. Oh and I was also putting over 20% of my income into retirement (you are allowed to put money in retirement once everything is paid off except for the house).
Also, the amount of interest that you save in doing it your steps would probably buy you a happy meal at Mcd’s. When you are on the plan, your motivation level to pay debt off should be top priority. That means that you are putting a lot of EXTRA money on the smallest debt. This EXTRA money goes on the principal of the loan; this reduces the principal which lowers the amount of interest that is due (5th grade math).
“COMMON” (JOB BLUTH – Arrested Development), you are still paying the minimum amounts on your other debts. It makes sense, your steps just makes things complicated and annoying, (did you get out of debt using your steps?)
-Thanks for your great insight
PS
I guess I may be able to argue your point because; I HAVE NO DEBT, do you?
I’m a well educated, middle-class, business owner.
Until I read Dave Ramsey’s book, I didn’t get that debt is BAD.
I didn’t get much personal finance education at home or in school. The first day I arrived at college to pick up my first student loan, there was a handsome, well-dressed young man handing out credit card applications.
And so it started.
$108,000 in debt later (and that doesn’t include the house), I’m following Dave Ramsey’s steps, but using my judgement and the advice of my personal financial advisor to modify them to suit our own individual situation. We have consoidated the highest-interest debts into a loan at a a much lower interest rate and will be paying off the remaining debts as quickly as possible, ranking them according to an interest-saving (about $850 vs. smallest-to-largest) and tax-planning strategy.
I appreciate the framework that the Ramsey philosophy provides, but I do think that it’s best if each person educates themselves about other options and chooses to follow his steps based on that education.
I think the core argument here is — maybe his methods aren’t best for everyone, and if an individual blindly follows the path advocated by any single advisor (especially one who has formulated a plan that is designed to be used by the masses), then maybe it won’t be an optimal plan for that person.
BUT, getting control of your personal finances using any method is better than the alternative, isn’t it?
[...] What I think of Dave Ramsey @ masteryourcard.com [...]
I’m coming late to this. I just saw this link at biblemoneymatters.
I’m using the debt snowball to pay off my debt. I’m totally aware I’m doing it a way that will cost me more money.
Why am I doing it then? Because I know me, and Dave Ramsey thinks like me.
My wife and I have one account that has only $170 dollars on it. Our highest interest rate account has a balance of a little over $11,700.
I know a lot of you think we should just be able to pay the small one off, but right now we have about $500 more in obligations than we can pay each month. We’re in the middle of selling cars, our house, etc. to try to lower our monthly outflows.
Anyway, back to the debt snowball. I know that if we started with the small amount we can put extra on an account right now (probably $5 to $10 a month), we’ll make next to no progress on that large debt. We’ll give up. We simply aren’t disciplined to keep it up if we don’t see some real progress. On the other hand, for the smallest debt, if we pay the minimum plus ten more dollars a month, it will be gone in less than a year.
I look at it this way . . . which one will cost me more . . . paying more in interest by doing the debt snowball, or using the debt avalanche (as some call the traditional method) and giving up?
Living in a terribly economically depressed town ends all that.. no job , no money, you use credit for BASIC LIVING EXPENSES. That is terrible.
Dave doesn’t change the economy and too often is very unrealistic . ha! i remember the few calls that stymied him, the ones where people have a disability preventing any decent salary.. it is also very easy to say ‘relocate’.. I did that and got further in debt because not all companies care to offer relocation expense. I also gave Dave MY list of times you need touse a credit card, (and yes these have actually happened in the REAL world): needing a tow in blizzard conditions at 11pm at night and the nearest bank atm’ is miles away.. when stuck on a dangerous island that doesnt accept debit.. and it is AMAZING how many places DONT take a debit card… like, if it is about saving money, then you need the card to reserve that internet only stupid fare price.. on and on it whirls.
I also informed him to wake up.. we are SINGLE women, got it? SINGLE. His constant refrain of ‘get a job deliverin’ pizzas’ was not only unrealistic but dangerous. Delivering pizzas does not involve, in my app experience, JUST delivering pizzas!! I got myself physically ill over and over , which causes inability to work for several days or longer, by holding two jobs and going to college. SOME can do it, dont assume EVERYONE can.. women arepaid less than men, period. From CEO worker to fast food. I was told by a cleveland pizza place that ‘you dont want to work nights here, it is too dangeous’ delivering pizzas in that neighborhood. Yes, i went to other pizza places, and they do NOT work around your day job or school schedule.. but apparently in his world they do, the safe place where women are respected on the job and can deliver pizzas or work loading packages at night.. i like how these advisors just throw these phrases out.. talk is very very cheap. I have heard of men injured by working that ‘2nd delivery job overnight’ and lost more in medical bills than the work-twenty-jobs-at-once-to-pay-off-debt paid them!! FACT. And as for his buy a junk, but running car routine? I bought a ‘90 volvo for $468, total, PAY CASH PEOPLE WAKE UP!!!! while others of you drove in your nice new cars that you make huge payments on.. while we used credit for basic survival not trips or toys or kids games uh,, making us sick! grow up! The volvo REPAIRS DAVE, could be $700-$1000 a pop.. you need a lot more than $1k in your emerg. fund.. this is all insanity, glad it worked for him and for some but do not paint everyone with the same brush.. I also liked his this isnt gonna last forever routine. Dave, as I said, dont just COME to Cleveland, stay here awhile. Raality: There are people here, highly educated, (one has a PH D) and have been working $7.25 or a bit more an hr for years, years!!!!! You can never ever ever get ahead with that. So this entire discussion and forum is moot for those who do not make enough to save or even afford any standard of living.. his go-and-get-a-brief-education (such as in the trades) uh huh, sure,been there.. the cost of ‘brief’ training is $4000 and up. You are only making minimum wage or a bit better.. now, you get grants due to constant financial hardship (been there too, Dave), and you have to drop a class because YOUR EVER IMPORTANT MINIMUM WAGE JOBCHANGES THE HOURS ON YOU ONE MORNING AT 11 AM (THAT HAPPENED TO ME, YEP) AND CONFLICTS WITH YOUR CLASS, SO, YOU, the ever good employee and get out ofdebter, drop the class and LOSE YOUR GRANTS. ! All of this is a very precarious balance, and needs to be addressed in much greater detail than a breezy ‘oh, you workin your three jobs for the last year?” I havent even covered getting fired because you are so frickin exhaused from all this training and classes and three jobs that you fall asleep at your desk, or worse yet, injure yourself from lack of sleep by falling down some stairs (uh, yeah, happened to me, guys, at night school, with the big huge blue swelling egg and red blood, limping to a bus in dangerous dark without a cellular phone because remember, conserving money by not driving or paying for cellular minutes!) Or my friend that couldnt afford a sitter so lost big potential income.
The manual underwriter? I called his requested provider and recv’d no response, ditto when i asked every co ‘do you do manual underwriting?’ haven’t recv’d one return phone call on that one! and my credit is very good!
You want to tell me how YOU worked Dave’s plan, or anything else about jobs? Call in to my radio show at blogtalkradio.com/wendy-w, DAY JOBS.
I talk REALITY.
Dave Ramsey is a failed Real Estate agent NOT a personal finance guru. What is the success rate vs people who invest alot of $$$ in his seminars, programs, etc? I would imagine it is really low, like any other feel better about myself program. He is a condescending flim flam artist, selling people an over priced bill of goods.
If you lack the self control to manage your finances, weight, emotions etc, chances are a flawed program is not going to cure your ills.
If you don’t like Dave Ramsey, check out Choose Financial Freedom. A lot of the advice there does the EXACT OPPOSITE of what Dave preaches.
Even if you do like Dave Ramsey, check it out because it shows you how credit cards can be used to produce wealth, how paying off your home is a bad idea, and how whole life insurance is a wealth building tool.
Dave is squirming in his chair somewhere.
http://www.choose-financial-freedom.com
I am obviously very late to this debate but I think it can be summed up like this: do what works for you.
That’s really all that matters. I did things the Dave Ramsey way (on accident, I hadn’t read any of his stuff when I first started paying off my debt) and I got out of debt a year earlier than I originally projected; I’ve already saved 3 months of living expenses and have been contributing to a 401k all along.
It works.
I wrestled with saving and debt repayment simultaneously and, for me, it didn’t work. I focused on the debt like a laser first. That worked for me. Did I lose any money. I don’t know. I don’t care. I just know that my net worth basically went through a $38,000 upswing in 3 years. Who cares which method I used to do it?
What I’d like to hear from you on, is what is the ‘traditional’ method of paying off debt versus the debt snowball.
I’m a little late to the party here, but I’ll add my 2 cents anyway…
Personally, I think it’s up to the individual. Does the Debt Snowball Method work? Yes. Does it cost more than doing it the “traditional” way? In most cases, yes.
But if it helps someone stick with the program because they’re seeing small motivating successes along the way, I’d say it’s a better system than one that doesn’t provide that and they don’t stick with.
In my opinion, the question isn’t whether Dave Ramsey’s methods are better than the traditional methods, the question is will Dave Ramsey’s methods work better for YOU than the traditional ones?
The comment from Double W a couple back points out that we don’t live in a “one size fits all” world where Dave Ramsey’s advice applies across the board. Looking at it from the opposite side is the same – not everyone has the willpower, motivation or whatever to follow the traditional methods. So even if the snowball method costs them more, it’s going to cost a lot less than failing at some other way.
Steve,
You ask about the difference between traditional and debt snowball method. When people in this post refer to traditional they mean paying off debt starting with the highest interest rate first. When that debt is paid off, you would take that money and pay it on the next largest interest rate balance. The last debt paid off would be the lowest interest rate.
The debt snowball method is a method taught by Dave Ramsey where you start with the lowest balance first. Once that debt is paid off you would take the payment that was just freed up and move it onto the second lowest balance. The real discussion is whether or not using the DR approach, which Dave would agree is not the most mathematically efficient method, is really a valid approach, since it ultimately costs more in interest payments.
I would have to say that after teaching several of Dave Ramsey’s Financial Peace University classes I have had this discussion many times. The ultimate answer is if you don’t want to do what Dave teaches, you don’t have to. The information Dave teaches is exactly correct. There is nothing he says that is wrong.
I think Kristy wanted this sort of discussion and it has proven very lively. I think the one thing that we can all agree on is that if we are looking for results, the DR approach works. If you are skeptical, listen to his radio show on any given Friday. When you hear families call in and tell how they have paid off $50,000 in 24 months, it is hard to argue with success. The part that often gets overlooked is the principle that is the foundation for the Baby Steps, and that is God’s Word. If you are not a Christian it is hard to understand what it means to try and serve two masters. The moment you realize the bondage that debt puts you in, and how it can prevent you from serving God, you will understand why Dave advocates no debt. Basically, he is just agreeing with God – Proverbs 22:7.
I am a fan of Dave Ramsey and have been trying to live without debt for the past year. However I did not follow Dave’s plan in the order he suggests. I created 6 month emergency savings first, then payed off rest of the dept around 40K in 18 months. I have not tried to find out if I have payed more when compared to the traditional method. At the same time, I cannot explain in words the joy and thrill experienced when each debt was payed off however small the debt.
What Dave Ramsey teaches is not something I did not know, I knew exactly what needed to be done, but was hesitating to do it. I credit Dave Ramsey for providing me the motivation to take that final plunge, in other words a kick in the rear end.
I understand the arguments against Ramsey’s snowball effect, but I have one other factor to consider between the two.
Ramsey’s theory is that debt=risk
Let’s say that I have 10 credit cards that are unequal balances, but different interest rates, but the same minimum monthly payment. Let’s say that the highest balance is also (unluckily) the highest interest rate. Logic states that you pay off the highest interest rate first to save money. But let’s say that my budget is stretched thin paying these minimum payments–that I can barely make those minimum payments while paying the utilities, rent, etc.
With his system, I save $1000 for an emergency first, then hit the “debt snowball.” As I pay off the smallest debt as fast as I can, then that frees up “extra” cash each month that I then roll into the next largest debt payments, to pay it off even faster. Wash, rinse, repeat.
Now, that ends up costing me more money in the end for sure. But let’s say that each of those minimum payments is $100/month. If I tackled the larger, higher-interest rate first, while paying the minimum on the others, I still leave myself vulnerable if an emergency or unexpected cost occurs. Yes, i’ll use my $1000 emergency fund, but how will I replenish it if I’m using all of my money to service these minimum payments?
But If I pay the smallest balances off in an accelerated manner, that frees up progressively more cash per month that I can continue to apply to the next-higher balance–OR I CAN USE TO REPLENISH AN EMERGENCY FUND IF SOMETHING HAPPENS. They point is, it gives a person more breathing room/flexibility. Maybe that will help him to avoid a bounced check, or late payment fee, or avoid utilizing credit to get over an emergency.
As an example, let’s say thatI have a $100,000 loan at relatively high interest, and ten $1000 debts, each with a $100 minimum payment. Let’s say I had a windfall of $10,000. Using the “traditional” payment on the highest interest, I would knock the big loan down to $90,000, and leave the other ten loans going. But while my recalculated minimum payment would drop on the $90,000 loan, I’d still have the other minimum payments to make, leaving me with very little breathing room. Whereas if I pay off all ten of the smaller loans, I then free up $1,000 a month, which I PLAN to continue paying down on my big loan, BUT I can use if something unexpected comes along.
Thanks for the discussion, but you are missing one thing…your theories don’t work with a huge percentage of people! Most people don’t manage money and credit wisely. As Dave says, “…if they were good at math, they wouldn’t have got themselves in this mess.” Take a look at the economy now and you will see your theories in action. Your guy spends more money because he never finishes paying off the 10K…he quits trying and gets deeper in debt. Dave is talking to the masses and the snowball system saves them the most money because they actually do it.
Dan, dude, I was agreeing with you.
I didn’t read all of the posts but I read a few.. The main reason I agree with Dave is the statement he uses all the time. If we were so good at math that his program seems flawed, we wouldn’t be in this predicament to start with. So if you have no debt, tons of cash in the bank and your mortgage under control then it isn’t for you. That’s just my view of Dave.
I agree with whatever method works for you (or me) to get out of debt and stay debt free. One key component that Dave suggests is to earn more money so that you are paying off debt in such large sums that the argument between focusing on highest rate debt or highest debt amount is really academic. Just get it done. Both approaches have the same end goal – I don’t see why someone’s difference in opinion would cause anyone such strife. If you don’t like it, do something different. We built a bigger emergency fund before attacking the debt snowball. Does that invalidate the core message? I think people need to breathe and stop attacking one another over minutia. When it comes down to it, if you’ve been living with credit card debt for more than a minute, you’ve already wasted quite a bit in interest. So an extra $975 in this lifetime is not going to change a whole lot. No plan, including yours Kristy, is perfect. I would suggest you spend less time hate’n on Dave Ramsey. I assume he doesn’t care and those of us who appreciate the plan are probably already convinced. So it’s a waste of energy. Help those who need it.
I am a bit of a financial TV show/blog junkie… Have watched Orman, Ramsey, and now the new one on CNBC w/ Carmen…
What I think is right about what DR says is that wealth building is about 80% behavior and 20% knowledge… I think the reason he is SO adament about the debt snowball is he has been bankrupt and had millions of dollars in real estate taken away… That is what worked for him, and as we all know our personal experiences are a large determinator (made up word) of advice we give to other people.
$900 something saved in interest is a significant amount, but not if you don’t work the plan all the way thru. You have to have those moments of “jubilation” for doing something positive. I agree with him on this.
What I don’t agree with him on (and do with you) is to not start saving ANY for retirement until you have paid off all debt except the house. HUH!!! Taking me as an example, my company has a guaranteed 2:1 match w/ a discretionary match of up to $1 on our 401K (to a max 0f 2% salary). For 2008, it was $2.92:1. I have about ~4K in CC debt which I am in the process of paying down. So I was just supposed to leave that ~8000 that my company put in my 401K on the table??! I only put in ~3500 all year into my 401K and the company put in 8K!! But under Ramsey’s plan, I would not have received any of this match. I think this is one of the biggest problems w/ Ramsey, his “one size fits all” mentality. In the real world, people don’t wake up one morning @ “time zero” w/ no debt, no kids, no parents to take care of, etc… You can’t box everyone in to a “one size fits all” plan.
“Do A plus B plus C… and you will be wealthy.” I wish life were that black and white.
He also just cannot STAND people asking him about their FICO’s. “Stop worshiping at the altar of the FICO.” OK, DR, we do not all have a net worth of 7 figures like you. To many many people, the FICO score is a BIG DEAL because it could be the difference in paying 1100/mth and 1400/mth on a mortgage. It could even cost some people their job. (as ridiculous as that is IMHO) While I wholly agree w/ him that people should live below their means, the fact is and will remain that the FICO or whatever model they come up with in the future will determine what interest rate you get on a mortgage, auto loan, etc.
Just my thoughts
I agree with nichoju – it is about behaviour. Dave Ramsey does admit that yes – numbers-wise it will save you some money to go with high interest first IF you are disciplined to wack all your extra money into that debt. But he is basing it upon experience that the majority of people who take this track will not stick with it.
For most people having to pay off a $10k debt is far more overwhelming than a $1k debt. Paying off the $1k motivates people to keep moving forward.
It’s psychology, and we as humans don’t operate purely on math. It worked for me, and it’s worked for thousands of others. Dave knows this works. The guy’s ideas are not flawed – and he definitely understands the numbers. But he seems to understand human psychology better than most.
Where I disagree with nichoju (sorry, not pickin’, yours just caught my eye because it was the last one! :)) – is the FICO. If you follow Dave’s plan, you won’t be obtaining a loan for anything other than a house. There are plenty of mortgage companies that do manual underwriting, so the FICO loses it’s importance. And believe me, even if you have an “excellent” credit rating, if you don’t have a “normal” work history you won’t get the best rate with a regular mortgage company that doesn’t do manual underwriting. I initially obtained my mortgage through Countrywide, and I had an “excellent” FICO score, but because my work history shifts between employed and self-employed, they would not give me their best rates (even though I could show consistent income through the 5 year period that they considered).
FYI I have no more credit cards, although my bank does have an overdraft facility attached to my account (I didn’t ask for it, it was automatic). I don’t use it, but because in essence it is revolving, it counts on my credit score as a credit account, and because I’ve had it for 20 years, my credit rating is still in the “excellent” level. So if you feel you must maintain your FICO, this might be the way to do it without a card. :)
While this article was written nearly a year ago (May, 2008) we are now sitting here in an economy (and nation) nearly ruined and brought down by DEBT.
So, criticize Dave Ramsey all you want, and then try to defend your criticism, but it is sort of like trying to defend Bernard Madoff (or made-off, as Jay Leno likes to call him).
The fact is, those of us who dumped all or most of our debt years ago are not hurting nearly as much as those saddled with tens of thousands of dollars in credit cards, student loans that pass through (still due) after a bankruptcy, and, or a house that is upside down and has a rising interest rate due to an ill-advised ARM.
One other flaw in this arguement; paying off high interest vs. lowest balance. Credit card companies now use psycologists, sociologists, actuaries, marketing experts and others to KNOW how people will react. So, you can criticize the idea of paying off high interst debt later, but Dave Ramsey AND the credit card companies know people often become frustrated over a sense of helplessness and give up on getting out of debt.
Dave’s recommendations are based upon taking typical and likey human behavior into account. So, you can claim paying off high balance debt saves $957, but that is ONLY if you don’t become frustrated and give up, which of course, the credit card companies are counting on.
Keep in mind that these companies are a lot like the tactics of the tobacco companies of the 60’s, 70’s and 80’s; they know that if they can get you hooked on their product, they can and do (did) control people’s behavior.
BOTTOM LINE: I don’t care if credit card companies start people at 9.9% interest and then jump it to 24.9%; I don’t have any credit balances that they can gouge me over, so the rate doesn’t matter. I also don’t care if a mortgage company is adjusting rates on ARMs from 2% to 14%; I don’t have an ARM. My rate is locked in at 5%, and I am able to pay that down early, allowing me to have a paid-for house BEFORE I retire.
So, your choice is still your choice. Criticize Dave, stay in debt, and continue to “be a slave to the lender.” Or, listen, learn and never, ever have your life dictated by a banker, loan officer, sleazy debt collector or credit card company again.
one word————-HOPE
Interesting that you have to find one small area of disagreement and then try to belittle what Dave is doing! His method has proven to help many people get out of debt. They can see it happening and it’s exciting. So, why try to criticize when he’s helping so many people. What is it about him that threatens you? Oh wait, you work for a bank, correct?
I would just argue that risk MUST be mathematically calculated when looking at debt exposure.
Frank said:
“Dave Ramsey is bad at math.”
Ummm, do I need to remind you Frank, and everyone else who says that Dave Ramsey is bad at math. The guy isn’t popular for no reason at all. Just listen to his radio show and to the number of people who call in saying that they have gotten rid of their debt. Geez.
I like Dave’s debt snowball plan as it helps me stay focused and build some wins along the way. With my different debts I had and their varying balances I would have gotten discouraged trying to pay off the one with highest rate first (because it was 3-5 times larger than my other debts). Getting the smaller ones out of the way allowed me to emotionally stay on track and stay motivated each time I was able to pay one off and then sock that monthly amount on the next. I didn’t have a seemingly undsurmountable mountain in front of me with a bunch of smaller ones waiting on the other side. I’ll be debt-free at Christmas using Dave’s plan and will have paid off over $33k in 33 months! (All that while accruing med costs in the same time and were able to pay for in cash!)
Besides, math is nice in theory, Dave helped me to see money is real life and real life involves emotions, motivations, distractions, relationships, etc…
Dave teaches you where you live and not from a bank counter where numbers fit “nicely” and conveniently.
I guess like I said before, it’s not about the math, but about the risks. If I can pay off those smaller balances completely, I then have that money to add to my snowball…OR if something comes up, I can go back to minimum payments on the rest of the debt while I restock my emergency fund.
If I’m trying to service more debts longer by trying to pay off the larger, higher-interest debt first, I wouldn’t have that “wiggle room.” I like his “lower your risk” philosophy.
I’m 33 came from lower middle class family, College grad and I have no debt, how?…I never got it in the 1st place. How about that for an idea? The key to all your debt problems, How about don’t put yourself in debt the 1st place. I like how people talk about emotions and relationships and the subject is money. That’s probably why they are in debt in the 1st place. What ever happened to personal responsibility? Ohh, this is real life, boo whoo, numbers are great in theory but I gotta live in the real world”…boo whoo….that type of thinking is what fuels the problem in the 1st place. Take your emotions out spending. Grow Up.
I didn’t read all the comments, but get the general theme–Dave Ramsey is bad at math. Here’s his response to this charge: If you were good at math, you wouldn’t be thousands of dollars in debt.
How many of you calling Dave “bad at math” are debt-free millionaires?
If the issue is whether or not the debt snowball is the fastest way to get out of debt, then the answer is no. But if the goal is to get the most people out of debt so that people can live a better quality of life, then I think the debt snowball is probably the best method to get out of debt for someone like Dave Ramsey to endorse.
Why? Because, while it might not be the most efficient, it is method that people are the least likely to get burned on. It’s like taking a cross country trip by going the route with more gas stations rather than the one with a few less miles.
If you can do it a faster way, great, but make sure you have the resolve to do it, because you are more likely to burn out. If you follow Ramsey’s method, you might not get mathmatically as far as is possible, but you will get far, and it works almost all the time.
@Jon: But there are other ways to address getting people in between gas stations. I’m the behavioral psychologist here at Thrive and I certainly agree that motivation is key: if you can’t people to follow the mathematically best plan, then it isn’t the best plan.
But there are ways to help people pay off highest debt cards first and maintain motivation. Showing them an easy graphical representation of what paying it off does, for example. Helping them budget. Giving them positive encouragement when they do things right. The list is long, and they are all things we try to do at Thrive, for obvious reasons: in the struggle to help people lead better financial lives, we certainly use every psychological strategy in the book.
I think Kristy sums it up well at the end – you have to show people the difference and then help them build a plan that sustains that. Ramsey is giving you a one-time plan that might help you, and that’s great. But the reason he is mostly concerned with motivation is because he’s not actually helping you every day, giving you tools, helping you touch back on growing your financial life. And that’s where I see online and other tools as critical: where Dave gives you a book, we’re giving you the tools.
And that’s “teach a man to fish” land. Not just saying “do this and it will work for you” but saying “do this, here is an easy to understand reason why, and let me fish right alongside you, so that you can ask me questions as you have them”.