My good friend, Nickel, is celebrating the second anniversary of his blog, Five Cent Nickel. Nickel is giving away several prizes, including a personal finance book, a couple of iPods, and a box of bricks! I am a huge fan of Nickel’s work and I suggest that you bookmark his site. (Click through the “March Madness” posts over at Free Money Finance and you can watch Five Cent Nickel and No Credit Needed battle it in round-after-round of tough competition. Ultimately, Nickel triumphed and was declared the contest’s winner, but, in an awesome display of coolness, he asked FMF to send ME the prize pack (for my kids)! I have received the prize pack and will write a post about it tomorrow!)
Nickel asked me to “rebut” his most popular post “Dave Ramsey Is Bad At Math“. I suggest that you go read Nickel’s post and then click-back to this post and read my rebuttal.
Basically, Dave Ramsey suggests that you list your debts by BALANCE and focus on paying off the LOWEST BALANCE first, regardless of interest rates. Dave suggests that by “getting rid” of the lower balances FIRST, you will receive a psychological boost to continue paying off your debts and that your efforts will “snowball” into debt freedom. Nickel points out, quite correctly, that Dave’s method, which focuses on BALANCE, could very well lead you to paying MORE in interest than is necessary. Nickel suggests that you pay your debts off by focusing on the account with the HIGHEST interest rate. Again, Nickel is absolutely correct when he asserts that, MATHEMATICALLY, paying off debts, starting with HIGHEST interest rate accounts, is best.
Now, time for a few points, from someone who successfully used Dave Ramsey’s method… me.
1. If you focus on paying off lower balances FIRST and pay them off, you will eventually have FEWER monthly minimums, thus freeing up “cash flow” if you have a lean month.
2. As you make progress, by paying off entire accounts, you WILL receive an emotional and psychological “boost”. Just like the person who loses five pounds during the first week of a diet, you will be receiving positive feedback and motivation. NEVER discount the role that our emotions play in financial matters!
3. The fewer accounts that you have open with balances, the better. If you are paying off your debts by interest rate, you may have several accounts open, with several bills to pay, several checks to write, and several dates to remember. If you can rid yourself of the burden of three or four smaller accounts, your calendar is less jumbled, you have fewer bills to pay, and your finances are much easier to manage.
4. The longer that you let a, say, $300 credit card balance “hang around” the more apt you are to use that credit card “in a pinch”. But, suppose you have paid that credit card off, put the card in a drawer at home, and “forgotten” about that particular account? Out of site, out of mind. Any account that you consider “in play” also becomes an account that can increase!
5. If you miss ONE payment on ONE account, due to the fact that you have so many accounts still open, then your interest rate savings (and perceived benefit) are gone. Again, the fewer active accounts, the fewer headaches.
6. From PERSONAL EXPERIENCE, Dave’s method actually works! I was in debt, I used Dave’s method, and now I am debt-free. While I MAY have paid a few dollars more in interest, Dave’s method kept me motivated, in charge, in control, and excited about getting rid of debt. Dave’s method allows for the “internal” boost that we all need to “take over” and “take charge”. Trust me, in the past I have used dozens of “techniques” for managing my money, many of them FAR more complex than Dave’s simple system, and I ALWAYS come back to Dave’s simple snowball. Why? It worked for me. (Hey, it’s also working for many of the members of the No Credit Needed Network, many of whom have paid off, literally, 10’s of thousands of dollars of their debt!)
In the end, I suggest that you use WHATEVER method works for you, but DEFINITELY, get out of debt. Being debt-free rocks, no matter the technique that you use to get there. That being said, I cannot over-state the role that Dave Ramsey’s snowball method played in my particular circumstance.
To purchase Dave’s awesome book, The Total Money Makeover: A Proven Plan for Financial Fitness click here.
Again, I want to congratulate Nickel on his second anniversary. He’s always been good about linking to me and encouraging me. Not only does he blog at Five Cent Nickel, but he also manages Raising Boys and Sports Injury Info. Check out his stuff and tell him “NCN” sent you!