Got Debt? Don't Listen to Dave Ramsey - NerdWallet
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Got Debt? Don’t Listen to Dave Ramsey

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If you’re drowning in debt, one of the worst things you can do is to listen to conventional wisdom – particularly from anyone who’s asking you for money. Think about it: Their incentive isn’t to get you out of debt, it’s to get themselves rich. Between Dave Ramsey, Suze Orman and that angry guy who manipulates stock markets, you’re left with seemingly simple Texas two-step plans that are either banal or outright wrong. If you’re looking to get debt-free, it’s important to take the personalities out of personal finance.

What’s wrong with the Debt Snowball?

The famed Dave Ramsey advocates the “snowball” theory of debt relief: after making the minimum payments, work towards paying off your smallest debt first, then gradually move up to your largest. He tells you to ignore the interest rate on your debts, and instead to focus on the momentum-granting psychological satisfaction that comes with paying off your debt. But there are two problems with this: If your highest-interest debt is also your largest, you’ll end up paying a lot more in interest.

If all your debts are large, you won’t get a psychological benefit. Ramsey says that you’ll be motivated to stick with your savings if you have the satisfaction of closing accounts – and that motivation is worth paying more interest for. By that logic, if you only have one credit card but you’ve racked up $10,000 on it, your best way to pay it off is to open another credit card, run up a $200 debt and pay it off before tackling the bigger debt.

Here’s an illustration of how the “debt snowball” method can cost you. You have three debts and $500 a month with which to pay them off:

Loan Type Interest Rate Balance Minimum Payment
Credit card 18% $15,000 $100
Student loan 8% $8,000 $100
Auto loan 3% $5,000 $100

If you use Dave Ramsey’s method, you’ll be debt-free in 101 months – about eight and a half years. You’ll pay out $22,613 in interest. That’s pretty substantial, almost equal to the amount you borrowed.

Instead, if you do the mathematically sound method – paying off your highest-interest debt first – you’ll be debt-free in 86 months, just over seven years, and you’ll pay a total of $14,650 in interest.

In this (admittedly simplistic) example, following Ramsey’s advice would increase the amount of interest you pay by over $7,000. That’s a pretty steep financial penalty.

Now, let’s look at problem #2: if motivation’s what you’re after, what happens if it takes a while to pay off your debt? In this scenario, you’d close your first account – the auto loan – in 18 months. Psychologists estimate that habits take anywhere from 21 to 66 days to form. If you can pay off a balance in three months, you might get some benefit from the debt snowball’s boost. But if you pass the 66-day threshold, saving and paying off your debt become ingrained – your habits form their own momentum. You’re paying extra interest for no added gain.

Better ways to stay motivated and get debt-free

Instead of banking on a dubious motivator, follow three steps to get rid of debt quickly and in the most cost-effective way possible.

1. Try to lower your rates

Credit cards

Negotiate your interest rate with credit card lenders by threatening to leave for a better interest rate. Tell them,

“I’d love to keep this account with you, but I need lower rates, and I can get an interest rate of 7% at a credit union. What is the lowest APR you’ll give to move debts from other cards?”

If they don’t lower your rate, follow through: transfer your balance to another credit card. Choose one with a 0% APR period, preferably one that doesn’t charge an upfront balance transfer fee. Minimizing the amount you have to pay is the most pain-free method of debt reduction.

Student loans

Consider consolidating your student loans to see if you can get a lower rate, or if you can move from a variable-rate loan to a fixed-rate one. Since interest rates are at rock bottom right now, a fixed-rate loan might save you money in the long run. Our student loan calculator helps you weigh consolidation options.


Finally, think about refinancing your mortgage. Interest rates are particularly low these days, making it potentially advantageous to do so. However, keep in mind the costs associated with refinancing, including potential property tax increases if your home is reassessed.

2. Gamify for free

Dave Ramsey advocates motivation at a price, seeking the psychological boost no matter the financial cost. But there are other, free ways to motivate yourself. The world is full of apps and programs that bring gamification and social support to your personal finances. A few examples:

  • StickK lets you set a goal, put your money where your mouth is, assign a referee and get support from your friends. It’s used for losing weight, quitting smoking and – you guessed it – getting rid of debt.
  • SaveUp is specifically related to personal finance, incentivizing you to save rather than spend. You link your bank accounts to your SaveUp profile, and if you’re diligent about paying down your debts, you’ll earn rewards and be entered into drawings for money, vacations, cars and more.
  • Payoff also rewards you for meeting your financial goals. You set milestones, share them with friends, and earn rewards for working towards them.

Not only can you avoid spending more money in the name of motivation, but you can actually earn some back.

3. Make one decision, then don’t make any more

The easiest way to stick to your debt payoff plan, however, is to take yourself out of the equation. Figure out how much you can realistically put toward paying down your debts. Got the number? Great. Set up an automatic transfer between your checking account and a savings account for exactly that amount, or have that amount direct-deposited from your paycheck into a savings account. Then, use all the money in the savings account to pay off your debt. Depending on the type of loan, you might be able to automate that transfer too. Out of sight, out of mind: If you don’t see the extra money to begin with, you won’t spend it. Ramsey points out, with some truth, that we can be our own worst enemies when it comes to long-term goals like becoming debt-free. To counter that, make the decision to set up automated transfers so you can’t sabotage yourself later on.

  • Bojo Boki

    If you knew how to add the numbers and how interest works, you wouldn’t be in debt in the first place. by Dave Ramsey

    • TheAtlantic64

      That’s inane. One of the pillars of capitalism is debt. Governments, corporations and people all need to make intelligent debt choices to move forward faster than they would otherwise. A young couple with student loans and a mortgage means that they understand how numbers and interest works, and recognized that good investments are tantamount to good debt. Stop drinking the Kool-Aid before it kills you.

      • Bojo Boki

        Hahah. Says the person who is eyes deep in debt. You enjoy your nice debt while I build wealth and become a millionaire before the age of 40. I like the Kool-Aid..its good for me.

        • TheAtlantic64

          Why stop with millionaire at 40? Keep advancing up the corporate ladder with a library card, and keep living in your mother’s basement until you’re at least 70. That way you can die a billionaire who lived a fulfilling, debt-free existence, aided by a nightly regimen of Ramen noodles and vicarious living through the stories of your friends.

          • Bojo Boki

            Hahaha…thanks for giving me a good laugh. Two houses in Europe, one about to paid off here in few years. No mom’s basement bud. Sucks that you live with your mom…Maybe you should work for once in your life and see how it is in “corporate ladder”, but you chose to be a smart brat. Its okay you will working at Walmart bagging my groceries since you are to stupid to do anything else.

          • TheAtlantic64

            One house about to be paid off in a few years? Tell me more about how only idiots have debt… actually, don’t bother. Your lies are as transparent as Dave Ramsey’s advice is comical.

          • Bojo Boki

            You are too stupid man, not worth the time. Go read something about Kardashians or listen to some Miley Virus.

      • Larry Dunham

        Limited corporate debt may have some stimulus effect in a capitalistic system, but personal debt doesn’t have the same effect; it is a drag on the economy. The money spent on interest on consumer purchases actually depresses sales of consumer goods and services. In effect charging a $10 movie ticket and then paying $10 in interest on the purchase over time is like buying a $20 movie ticket, so people cannot afford to go to as many movies as they could if they paid cash instead of charging it.

        In contrast, corporate debt is used mostly for capital spending which expands the company’s productive capacity, increasing the total amount of goods, services, and currency circulating in the economy.

        • TheAtlantic64

          Credit card debt is less than 10% of personal consumer debt in the US. We aren’t talking about movie tickets. We’re talking about the generalized “debt is bad” meme, and by definition, most personal debt is comprised of student loans and mortgages. People spend too much on education and buy homes that they can’t afford, but those issues don’t mean they aren’t, generally, still net positive debt investments. Without student loans and mortgages, the modern economy collapses, and to portray “debt” as a negative is simply modern cult nonsense that sells a lot of self-help books.

  • Craig List

    The math on the above example is actually kind of interesting; I’m not sure if these numbers were selected accidentally or on purpose. If you simply pay minimums, you should expect to get soaked with interest. In fact, you can’t pay off a $15,000 loan at 18% interest making minimum payments of $100. It’s impossible.

    It’s pretty easy to poke hole’s in someone’s theory if you leave parts of it out. The mathematical equation above is very precise, but omits a key part of Dave’s advice: pay extra on the smallest debt. Dave would never encourage people to simply stick to paying minimum payments. He says to “attack” the the smallest debt. Pay it off faster than minimum payments. And in addition to the psychological boost of paying off a balance, that focused intensity trims off a great deal of the interest.

    If you run the numbers (which hardly anyone does these days, otherwise, how would they possibly allow themselves to owe $15,000 at 18% interest?!?), even paying an extra $100 a month tremendously knocks down the payment time (faster than 86 months, Ms. Sekar), and the amount of interest paid.

    I’m sure there is still an “interest gap” between Dave’s method and the one suggested here. But personal finance is more than math; it’s about discipline and behavior management. I would be curious to know how many people will point to this article as the reason they successfully became debt free. I suspect, not as many as would point to Dave Ramsey (and, I bet none of them complain about the extra interest they paid).

    I wonder…is Ms. Sekar debt-free?

    • disqusaccount1981

      @Craig, All your points are correct above. I would also point out that most people in a lot of debt are on the verge of having everything fall apart. Like their car breaks, and they can’t afford the payments on their credit card. When you eliminate a credit card payment (which is usually more than the interest at minimum anyway), you reduce your total monthly obligations.

      Getting rid of that small debt means that you have one less obligation that month. If you come on bad times, you now have a little more freedom than you had before. Hopefully, that keeps your head above water.

      I would admit that there are times and circumstances where paying off a high interest debt would make sense. But I think there is huge merit in going simple. If you make things too complicated, no one ever follows through. There are theoretical ways to save a few buck s here and there, but like you said, this is very much about behavior modification.

      Also, Mr. Sekar fails to mention any of the other parts of Dave Ramsey’s plan. Buying used cars instead of new, paying cash to help you better budget groceries and eating out… When you piece it all together, you will do much better than you can by his so-called math. In the end, this is about a lifestyle change, not a math problem.