Let's take a look at the difference between Dave Ramsey's "debt snowball" and what a rational accountant would advocate when concerning paying down debt.
One of Dave Ramsey's financial "inventions" is his advocacy of the "debt snowball". What is this and how does it work? Well the snowball analogy is like that of the asset snowball in that, as you pay off more, the more you're able to pay off. Hence it rolls down hill gathering momentum. Your mortgage actually works like this. The difference in the amount of debt you pay off in the first 10 years of your 30 year mortgage and the amount you pay off in the last 10 is staggering.
So here's an example of how it works:
Credit card 1: $5,000 at 12%
Credit card 2: $10,000 at 17%
Credit card 3: $15,000 at 15%
Under Ramsey's debt snowball, the underlying principle is that you pay off your debt balances with the smallest amounts first. Why? It's a psychological trick to keep you on track. You see that you're making progress. So in the example above you would pay credit card 1 off first, then 2, then 3, only in that order. This is counterintuitive to a mathematician or in this case an accountant.
So here's an example of how it works:
Credit card 1: $5,000 at 12%
Credit card 2: $10,000 at 17%
Credit card 3: $15,000 at 15%
Under Ramsey's debt snowball, the underlying principle is that you pay off your debt balances with the smallest amounts first. Why? It's a psychological trick to keep you on track. You see that you're making progress. So in the example above you would pay credit card 1 off first, then 2, then 3, only in that order. This is counterintuitive to a mathematician or in this case an accountant.
This method would give a CPA brain hemorrhage! Why? Because under the Ramsey method it's going to cost you more money to pay it off than his way. Under his method you always pay off debt starting with the highest interest rate first. This is because it is costing you the most money, so you need to wipe it out first. How much would you save via this method? Well everybody is different, but let's use the scenario above. Assume you get a hair up your ass and start throwing $1,000 a month at the debt on top of the minimum payment, then it would take you 27 months to pay off via the account's way and it would take you 28 months via Dave's debt snowball.
Whoop-dee-fucking-doo! 1 month is nothing! Especially when you take into effect that under the accountant's method you are less likely to finish at all.
In case you can't tell, I'm in favor of the "debt snowball" rather than the conventional thinking. You are much more likely to succeed when you see progress, rather than having to see it all happen at the end. Have you ever tried to lose weight??
So focus on amounts, not interest rates. If you have a few credit cards with a $1,000 on each, then a car loan for $5,000, then another credit card for $10,000, then student loan for $30,000 and finally the mortgage for $150,000. Go after it in that order! Don't be afraid to mix and match. There are some specific exceptions to this rule given each person's unique situation, but it's a good rule of thumb to follow.
Whoop-dee-fucking-doo! 1 month is nothing! Especially when you take into effect that under the accountant's method you are less likely to finish at all.
In case you can't tell, I'm in favor of the "debt snowball" rather than the conventional thinking. You are much more likely to succeed when you see progress, rather than having to see it all happen at the end. Have you ever tried to lose weight??
So focus on amounts, not interest rates. If you have a few credit cards with a $1,000 on each, then a car loan for $5,000, then another credit card for $10,000, then student loan for $30,000 and finally the mortgage for $150,000. Go after it in that order! Don't be afraid to mix and match. There are some specific exceptions to this rule given each person's unique situation, but it's a good rule of thumb to follow.
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