When it comes to paying down debt, mathematically speaking, they say it’s best to pay off the highest interest rate card first because it’s costing you the most money. But what matters here isn’t math. After all, if you’ve already paid thousands of dollars in interest, honestly, what is a hundred dollars more? It’s nothing.
No. What matters more than anything else is the SPEED at which you get out of debt. Dave Ramsey recommends paying off the smallest balance first because it’s about behavior modification, something most indebted people need in the extreme.
When that first debt is paid off, it creates a change in your psyche. You see that you CAN do it, and suddenly, you’re a lot more willing to sacrifice, work more, sell stuff, and cut back your expenses and lifestyle to get out of debt. And if you can get out of debt FAST, you don’t mind sacrificing so much.
If Dave’s 25+ years of experience at helping people get out of debt this way doesn’t convince you, here is an actual intellectual study on the snowball method from Northwestern University.
I love Suze Orman, I listened to her podcast and watched her show on CNBC until she retired this past March, but she had this thing called the 20% rule that is just about the worst “quick” way to get out of debt I have ever seen. She was on her show touting this as, and I quote, “the best and fastest way” to pay off debt. It works like this: You take all your minimum payments and add them together, take 20% of that total, and pay that much extra on your highest interest rate debt.
Let’s just ignore the fact that she had them lined up smallest to largest anyway (and let me point out, your biggest balances often have smaller interest rates anyway and vice versa). It would take you 2 years to pay off the first debt this way. It’s just not a big enough pony being thrown at the first debt. Honestly, after two years, I better be almost done or I quit, because I’m just too impatient for that.
In her example, she has you getting out of $15,000 of debt in almost 6 years! Yes, it’s far better than just paying the minimum payment, but when you feel pain, when you have to get uncomfortable to pay off your debt, you’ll make sure it NEVER happens again. Not to mention, the quicker you can get the debt paid off, the easier it is to stay motivated. And six years is not quick enough.
On Dave’s plan, you can get out of $15,000 of debt in 2 years or less! Our friend Jane used Dave’s plan in the real world to pay off $11,000 worth of debt in 13 months, and she was bringing home $25,000 a year. I’ll take that over 5 years ANY day! Sacrifice, focus, and gazelle intensity is what you need to get and STAY out of debt.
When you pay debt off that fast, it doesn’t matter which card or loan or whatever you pay first.
I understand what Suze is trying to do. She’s trying to meet people half way. She’s trying to get them to understand that if they only pay the minimum, it’ll take them 30 years and tens of thousands of dollars to get $15,000 out of debt, and that’s if they never make another charge on those cards, and we all know they will, so basically they will be in debt for life.
But that is not the best OR the quickest way pay off debt. It’s not even a good way. It’s just better than the worst way.
From my personal experience, the best way to get out of debt is to do whatever is going to get you out the FASTEST. Not “save” you the most money. You’ve already paid thousands of dollars to the into the fat, overflowing pockets of credit cards executives. Speed is the key. Not math. And certainly not 20%.
When you are in debt, the banks own your paycheck. You’re working hard all week to pay them to use their money at a premium instead of using your own damn money. Because you CAN’T! Because the banks OWN your butt.
What I like about Dave’s plan is that I feel like it inspires a change of attitude in the people who need it the most. If you’re like my sister, never really been in debt, makes decent money, it doesn’t matter so much. People like that who stumble into debt are not going to stay in debt long anyway – they can’t stand it. But people like Jane, we need something drastic, and yes, RADICAL to shake us and wake us up.
Get mad. Get gazelle intense. And put YOUR money back where it belongs, in your own front pockets.
See this post on how to “find” money to fuel your debt snowball and kick massive debt off a cliff.