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Dave Ramsey’s Debt Snowball Method Is Not The Best

by Charles on January 27, 2012 · 15 comments

By now, most of you have probably heard of the famous Debt Snowball method, developed by Dave Ramsey himself. The method is designed to help those in debt to get out of debt as quickly as possible. Personally, I think this is a great method with very high success rate and I support it 100%. However, it simply is not the most economical method to eliminate debt. You will often end up paying more in interest and will sometimes even take you longer than the traditional ways of eliminating debt.

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Debt Snowball
You see, the debt snowball method calls for eliminating the debt that has the least outstanding balance, regardless of interest rate or terms of the loan. For example, if you have two credit cards with debt you want to eliminate, you would put maximum effort in paying down the card with the lower balance off first while paying just the minimum amount due on the other card. When the first card is finally paid off, then you would proceed in putting maximum effort in paying down on the remaining card.

The Debt Snowball method does not account for the interest rate at all. If Credit Card A has a balance of $5,000 with 10% interest and Credit Card B has a balance of $10,000 with 20% interest, it doesn’t make any sense to pay off credit card A first. But the debt snowball method calls for that. On the other hand, if you pay off Credit Card B first, then you will save more by paying less interest.

So, why does Dave Ramsey tell us to pay off Credit Card A first, the card with lower balance and lower interest rate in this scenario? Financially, it just doesn’t make any sense.

Financial Responsibility
It can be safely assumed that if you carry two credit balances that total $15,000 in debt, then you are a financially irresponsible person. A financially responsible person would not be put themselves in a situation where they would be in such a big debt, especially of the credit card variety. Additionally, in order to become debt free after putting yourself in debt to begin with, it requires even greater financial responsibility. You could apply for a free balance transfer credit card and transfer the balances to avoid paying interest for the time being, but without financial responsibility, you could end up worse than you were before. Odds would indicate that such person would not be able to come out debt by their own accord, without getting help from someone else. That’s where the Debt Snowball method comes in.

It’s All Mental
Debt elimination, along with other addiction like smoking and gambling requires a great mental advantage in order to become successful. You just have to force yourself to do it! Dave Ramsey insists that personal finance is 80% behavioral and 20% knowledge. With debt snowball, by eliminating the one with the lowest debt, the gratification of having some sort of success will come sooner, which will motivate you to keep going. In contrast, if the highest debt balance has the highest interest rate as well, it will take longer time before fully eliminating it. Not seeing the results right away may sway you into giving up prematurely.

It might be a bad example with only two credit cards, but imagine if you had 12 credit cards with debt in all cards. Trying to eliminate the debt all at once will be a struggle. But by attacking the card with the lowest balance first will result in a higher rate of success.

What are your thoughts on Dave Ramsey’s Debt Snowball method? Have you tried it? Does it work?

This post was featured at Carnival of Personal Finance #347, The Giants Edition.

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{ 13 comments… read them below or add one }

BeatingTheIndex January 27, 2012 at 6:19 AM

I think like you said, it’s 80% psych, so starting with smaller balances is the key to success with the bigger one later on. Not perfect as it ignores the interest rate but it works.
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Charles January 29, 2012 at 11:00 PM

i really do think it works. but it does require responsibility. whatever the plan is, as long as you are committed to sticking to it, then you should be good.

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SB @ One Cent At A Time January 27, 2012 at 5:34 PM

I don’t think its bad for every one. You have to adopt after customizing it to your situation. Many people got benefited by his method
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Charles January 29, 2012 at 11:02 PM

customization is definitely important. I think the debt snowball method is just an outline of how it should be done. but definitely, everyone’s situation is different.

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Jackie January 27, 2012 at 7:03 PM

Well, I think you answered your own question about why Dave Ramsey says to pay off the lowest balance first when you said, “Financially, it just doesn’t make any sense.”

Neither does getting into credit card debt in the first place. If people were basing THAT on math, they wouldn’t have a debt problem, because borrowing the money doesn’t make any sense.

I was down to only 1 debt (our mortgage) before I’d even heard of Dave Ramsey, so I didn’t try his “lowest balance first” method. (A debt snowball can be in ANY order though, not just lowest balance first.)
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Charles January 29, 2012 at 11:02 PM

yep, i agree 100%.

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Kay Lynn @ Bucksome Boomer January 29, 2012 at 4:03 PM

I did use Dave Ramsey’s debt snowball method and it worked for me. I started off with over $50K in debt and have less than $3 K to go.
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Charles January 29, 2012 at 11:03 PM

wow, congratulations! that’s an incredible progress. how long did it take you to go from 50k to 3k?

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Kay Lynn @ Bucksome Boomer January 30, 2012 at 8:50 AM

It’s been 2 1/2 years. Not as gazelle intense as Dave would like, but it’s been continual.
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Jon -- Free Money Wisdom January 29, 2012 at 9:32 PM

I think you also have to start with storing away an emergency fund. This is crucial. Paying off debt will do you no good if you end up homeless. Pay off your debt as quickly as possible, of course, but also set aside funds for emergencies. Good article!

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Zack Jones January 30, 2012 at 8:46 AM

Dave does say if you have two debts that are the same amount, or very close, to pay the one with the higher interest rate first. He also freely admits that mathmatically his approach isn’t the best one but by starting with the small debut and seeing small victories that people are more likely to stick with the program and keep paying off the debt. I’ve just started the baby steps. My wife and I have completed step 1 and are working on step 2 now.
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Michael Cochren January 30, 2012 at 7:46 PM

We used Dave’s Finacial Freedom books and went to the 13 week coarse. It was great. Met some very interesting people too. It was kind of nice to be able to talk to strangers about your financial problems and see that they had the a lot of the same problems and then some. The debt snowball method worked very well for us. We paid off about $22,000 in a very short time by restructing where we spent, how much we spent, and dumped any bad investments (like whole life insurance, got the money and bought term insurance). We are totally debt free and I know we would not be there if it was not for his easy to follow plan. We are able to fully fund our Roth IRA’s now and invest in our retirement. We gave his plan to our son when he got married and he loves it. We give it, along with other gifts , at all the weddings we go to now. Also we give well above the 10% at church now.
I would recommend this to everyone. We could use a “National Financial Freedom” plan for the country.

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Laura Vanderkam February 14, 2012 at 5:42 PM

I think there’s a parallel with weight loss. Long term, the most sensible thing to do is eat less and exercise more. This results in losing 0.5-1 lb per week. The problem is that weight fluctuates a lot during the day, so if you go up and down 3-5 lbs in a day, losing less than a pound a week looks like nothing for a month or more. That’s fine if you’re an incredibly disciplined person about food. But if you’re an incredibly disciplined person about food, why are you in a position where you need to lose weight? (There are a few reasons – medications, postpartum, etc. But that’s not everyone). That’s why people trying to lose weight really crave diets that show a quick weight loss in the beginning. Even if it’s just water weight. You want to see payback for the effort. That’s why people get into the snowball method. People need to see progress.

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