RULE #8: Forget Dave Ramsey – 80% of Financial Advisors Dismiss the Debt Snowball Method

Personal Finance
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Student loans, credit card balances, car payments and medical bills. You feel like you’re drowning in debt, but don’t know where to start. Your banker cousin tells you to start with the highest interest rate debts, then work your way down the list, the “Mathematical Answer.” Well-known personal-finance guru Dave Ramsey advocates the “Snowball Method,” when you pay just the minimum payments on all your obligations, while focusing on eliminating your smallest debts first. His thinking is, paying off your smallest debts gives you the momentum to tackle the larger debts in your life. So who’s right?

NerdWallet surveyed 100 financial advisors to get their thoughts: 80% of advisors recommend the mathematical method as the “right” way to get out of debt.

Despite the survey results, advisors also recognized the psychological benefits of the “Snowball method”:

“Dave’s advice is great for the psychological benefit of getting rid of the number of debts, though the mathematical way of paying down the highest interest rate is the “rational” right answer.   Perhaps something in between that pays off a bit more of the higher interest debt while still getting the pesky little debts out of the way faster as well, ” offered Debbie Gallant, CFP® (Gaithersburg, MD)

Some staunchly advocate the mathematical approach:

“Why would you ever want to pay more interest than is necessary?  The Snowball could cost you hundreds or thousands more when it is all said and done than prioritizing your high rate debt first.  If you need some motivation, find someone who is going through a similar debt reduction exercise and work together,” says Jonathan Duong, CFA (Denver, CO)

And finally, some plan is better than no plan:

“Either method is fine, having a plan in place is more important.” – Tony Blagrove, CFA, CFP®  (Los Altos, CA)

 

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