I’ve not thought too much about Dave Ramsey for some time, not since before I adopted this format and was writing a monthly article. In one article I discussed his Debt Snowball, and quote him as saying “Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly. Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.” I understand when authors are responding to a question from a reader often don’t have the time or space to offer as detailed a response as they might like. This statement, however, was on his site as a rule to follow, and he even added, “The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior.”
A few weeks back Adam Baker of the site Man vs Debt showed me another spin on the paying down of debt in his “Debt Tsunami: The Ultimate Method For Paying Off Debt.” No problem with this, Adam acknowledges the differences in payoff methods, and suggests that one should lower their stress while lowering their debt. (I like that idea, and his approach.)
Then, I read Money Smarts’ Is Dave Ramsey a “Financial Expert” and this prompted me to start polishing a spreadsheet and newer article I’d been working on to take another look at the Snowball. To clarify, if you’ve not heard of Debt Snowball yet it simply means that you line up all your debt by balance. You then make the minimum payments on every debt, except you pay any extra money budgeted to paying off the smallest current balance. I’ve always claimed that paying in order of rate is the right way to handle this.
Late last week I read another article, Fiscal Geek’s The Debt Snowball Saved my Marriage: Spreadsheet Tell-all and found via his site, a spreadsheet The Debt Reduction Calculator, which amazingly, offers a pulldown tab which allows you to choose your method of payment.
First, Dave’s Debt Snowball:
Then the Debt Avalanche (paying highest rate first):
Wow, the difference is $4381.62, quite a difference. Now, to explain, the most dramatic difference comes from the wide spread from high rate to low, as well as the balance on the high rate card. Would you really feel better paying those smaller balances so quickly once you learned that those good feelings came at such a high cost? I didn’t think so. And my experience shows that your lowest rate cards may very well be the cards with the lowest credit lines as well. So you might have four cards each owing $2000 at 10%, but one card with a $10,000 balance at 24%.
Tell me, does this put an end to the Snowball debate?