It’s been said that “Dave Ramsey is Bad at Math” — tongue in cheek, I imagine, for the sake of an attention-getting headline. Just yesterday though, a commenter on my post that explains how the debt snowball method works suggested that I learn some math.
I thought John brought up some great points, so wanted to respond in more detail, since others might be thinking something similar.
Here’s John’s comment:
This is really bad advice.
It is a very basic mathematical exercise to show that the debt snowball method results in you paying a lot more in interest fees than you would pay if you put your attention on highest interest rate debts first. The argument here is that it is a psychological benefit. Well, sorry but I think paying off all debt much sooner is a much stronger psychological benefit than snake-oil repayment methods that take much longer for people to complete because they end up accruing much more interest. Once again, this is very basic mathematics and I suggest the author of this page learns some.
And a part of my response:
…note that I said “To use the debt snowball method, you usually start out by organizing your debts from the lowest balance to the highest balance.” (Emphasis added.) The key point to the snowball is that you chuck as much as possible toward the first debt in your list, while making minimum payments on the rest. That debt can be any debt. Judging from Dave Ramsey’s track record though, I’d say more people are motivated by quick progress — which happens when you put the smallest debt first. Not that many people are likely to stick with things they don’t see progress on.
Let’s go back to John’s comment. He starts out by saying that “It is a very basic mathematical exercise to show that the debt snowball method results in you paying a lot more in interest fees than you would pay if you put your attention on highest interest rate debts first.”
Since I have my handy debt snowball app (with correct math, btw) it’s easy to tell just how much faster you get out of debt with each variation of the debt snowball (lowest balance first, highest interest rate first, or debts in a custom order).
I’ve looked at the lists of debts that other people have sent me, and I can tell you that the savings (time and/or money) for each order varies. Sometimes it’s a few months, or a few hundred dollars. Once I even saw no difference. If someone had two debts of equal amounts, but one with an enormously high interest rate and one at 0% interest, it’d be a large difference.
Why all the variation? Because everyone’s list of debts is different. Different interest rates, different minimum payments, different extra amounts that they can chunk toward debt, etc.
A critical point
But I’ll tell you one thing that’s true in all cases: if you stick with it and have multiple debts, you will always get out of debt faster using the debt snowball method than you would without it.
That’s due to one simple mathematical fact: when you use any variation of the debt snowball method, you put more money toward debt. When you don’t use it, you spend the money you’d freed up on something else instead.
There are reasons why one variation of a debt snowball might work better for you than another, but they all come down to motivation and psychology. I’ll explore those in another post. The main thing though is to do what works for you.