Total interest paid isn’t everything. Greater flexibility to manage expenses is quite valuable, especially with today’s job market. With the possibility of kids and other unforeseen family expenses, I figure we’ll end up taking our sweet time to finish off our student debt for good.

1) Depending on when you got student loans and when you consolidated, the interest rate could be higher than interest rates on other debts (I have college students who have graduated in recent years with student loans with 12% interest, for example. My husband consolidated his monster loans at…8.25%. Mine, I consolidated at 3.5). But…the interest rate (usually) doesn’t change, forebearance/deferral are possible in case of job loss (not true with many other kinds of loans), and disability can cancel out part or all of the loans. I think getting out from under credit card debt even at lower interest rates is always better.

2) How much of the debt is to family/friends? Even if the interest rate is low, you might be better off paying this off early to square things with people.

3) Emergency funds: Having blown through our poor little baby EF TWICE in one summer (an appendectomy and a new unplanned-for roof), we’ve decided a larger cushion (more than Ramsey’s $1000) is necessary before we tackle the student loans. But we also have extremely secure jobs, so that tempers things a bit.

Your attitude is that he’s an ineffective guy and maybe even borderline destructive. What’s destructive is people disagreeing over when, how, and whether they should get out of debt. Divorces happen because people won’t get on board and agree to get out of debt. He makes people want to be the one who gets on the radio and scream that they are debt free. I wish Governor Schwarzenegger would have been smart enough to listen to Dave Ramsey’s stupid snowball idea.
So, go ahead and criticize his inferior idea. We can all start calling you “Betamax.”

You’re right- absolutely. But you’re a serious person who is capable of assessing consequences in your mind using a long-term, beyond-tomorrow-and-the-next-paycheck point of view. A lot of people are simply not serious about their finances.

There are plenty of adults who do not have the emotional maturity and personal discipline to make a PF decision based on the best fiscal consequences for themselves in the long term. In short, they’re children with jobs, mortgages, credit cards, and debts. These folks NEED Dave Ramsey to yell at them and play psychological tricks on them to break down the mental trap of “if I just don’t open my statement I can pretend the problem doesn’t exist.”

Some people who go through the Ramsey method begin to wake up from their PF nightmare and realize that the snowball method is costing them more than the avalanche, and switch. Most of the rest of them don’t, and need Ramsey’s methods.

The reason I find it difficult is because this means I keep my current budget with a relatively slim margin, which means saving up for anything I want (such as that new bed you recommend) takes a long time because of the slim surplus. I get frustrated and out comes the credit card. If I pay off one of the smaller debts, I get to that larger surplus much faster, and maintain my discipline in saving for what I want… which as some psychological rewards of its own. I paid off all of my credit cards and am now wavering once again between whether I should pay off my car first or go for the big kahuna straight off. To help me make a better decision, I’ve started to bucket my debt payoff at ING so it can collect a little interest while I decide. Of course 3% (before tax on interest) is definitely less than either the car or mortgage interest lost, when I do take that bucket and dump it on a debt fire, I feel good about the decision and the process to get there.

(That and my stupid mortgage company charges $10 to make extra payments online. So I build up large chunks before making the payments.)

I set up one which I am very proud – where I combined your logical thinking with the debt snowball. I put one CC which had the highest interest because I knew getting that off was priority #1 – then applied the debt snowball method.

Like most things in life – there are shades of gray.

Awareness: “Rational and logical” and “emotional” are not mutually exclusive. Even people who are motivated emotionally can begin to understand the necessity of rational thinking in certain circumstances. In fact, they’ll need to if they wish to address underlying problems rather than just treating the symptoms of debt.

Also, I’ve already addressed the emotional aspects. There are ways to make the Debt Avalanche “work” emotionally as I wrote about above, without sacrificing the extra time and extra money required by other methods of prioritizing debt.

In some cases, people get into unmanageable debt due to *poor decision-making* which they rationalize by saying “I’ll pay it off later” or ignoring the consequences. Choosing a method that takes longer and is more expensive to pay off that debt, once they are ready to do so, is another case of *poor decision-making* rationalized by saying various things like “I’m motivated emotionally” or “Dave Ramsey says it’s OK.” Yes, even “emotionally-motivated” people “rationalize” their actions and decisions. (In some cases, people get into debt for reasons not related to decision-making at all, and that’s another issue.) You can be driven by emotions, that’s fine, but you can’t change your mindset about debt until you begin to think logically about money.

The logical approach will only work if people make emotional connections to it and break their other emotional connections to spending and saving.

Starting with small wins first, the snowball method appreciates the human element in this. It understands that most humans are driven more by emotions than by logic.

Thank you, your post was very useful to me.
Timmy

Besides, someone with that kind of debt load would have to make more than 200K a year to come close to being able to pay the amounts you listed. Your example was not well thought out or very realistic. Also, even if you did choose wrong and focus on the mortgage, the minimum payments on those credit cards would have them balanced to zero before the mortgage was paid (in just over 10 years.)

I love that.

It is mathmatically superior to pay off higher interest debts first. It is also mathematically superior to not have the debt in the firstplace….or is it. I mean, mathmatically why pay off any debt whose interest rate is lower after taxes than an alternative retun on investment.

What about the opportunity costs of this mathematically superior way. It makes perfect sense with standard stepped debts, but what about odd situations.

Say I have a mortgage at 7% for $500,000, a car loan at 8% for $50,000 and 20 credit cards with an average rate of 5.99% and an average balance of $2,000 each. (don’t laugh, I have seen it)

According to mathematics, I should be paying off the mortgage first. Great. Now I get to pay on 22 separate debts, track them, reconcile them,etc for the next 20 years because it “mathematically” makes the most sense.

Your thesis for”mathematics” fails to consider the most important of issues regarding personal finance. RISK

No one ever give risk enough weight. Not paying off revolving debt cariies risk. juggling several debts carries risk. All debt carries risk. The interest rate is A factor, not THE factor. Balance is A factor. Risk is also a factor. Risk of rate changes, universal default,etc.

The best way to eliminate debt is to pay off the RISKIEST debt first. Sometimes it is the one with the highest payment, sometimes the highest interest rate, sometimes the highest balance.

You must also consider life situations. If you are trying to reduce your debts to qualify for a better rate on your new home purchase, lenders care about your MONTHLY debt obligations,not your TOTAL outstanding debt. Paying off a low interest (5%)car loan with a $700 monthly payment will make a much larger impact than eliminating a 20% $4,000 credit card balance. If that car payoff gets you a .25% better interest rate on a $200,000 mortgage, it is “mathematically superior” to pay attention to your own situation and pay of the loans with RISK.

Rock on!

“We are more concerned with modifying behavior than correct mathematics…. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of those times.” -Dave Ramsey

Your argument is presented, but your readers shouldn’t accept that “if your debt reducer can’t see the big picture and choose the faster, cheaper, better option of the debt avalanche method, then they haven’t learned to separate money from emotions or to make intelligent decisions about their finances.” Your highest-interest-rate-first method is mathematically superior (and that’s not a consession, it’s a fact made by plenty of bloggers way before you), but an intelligent decision for EVERYONE is managing the individual’s behavior. Some might do best with this method, some might do best with Ramsey’s motivation, some might do best by building up a cash reserve before tackling debt, some might do best by paying off secured debt before unsecured debt. You shouldn’t mislead your readers into thinking they’re retards that will always be in debt if they can’t figure out how to pay the high interest rate down.

One personal example is on a recent trip to Canada I made a dozen or so purchases in a weekend. I managed the exchange rates OK, but the bank charged me a currency conversion fee which made me overdraft my account (and if you tell me I should’ve memorized the fee schedule, I’m going to kick you in the nuts). After this hit, I had a necessary vehicle expense which I couldn’t pay, and had to put it on my credit card. Because I’m not a robot and have a dynamic financial situation, I found it best to build up a small cash reserve in checking at, *GASP!*, 0% interest. Guess what! I don’t pay overdraft fees anymore, and I’ve completely stopped adding any additional credit card debt. At a card interest rate of 10% and an overdraft fee of $35, it’s MATHEMATICALLY better for me to hold $300 for a year as cash at 0% than to put it toward the debt, and I won’t expand my total debt if any unexpected expenses of less than $300 show up.

To your readers: your most intelligent decision is whatever gets you out of debt, period. You’re plenty intelligent if you can simply accomplish that goal, and not try to follow a plan that doesn’t work for you that could theoretically save you $75 a year in interest charges. Take his advice, keep on reading, and do what’s best for you. (you genius, you)