What is Your Opinion of the Dave Ramsey Plan to Get Out of Debt
Posted July 9, 2013
WRAL Reader Question
We have $30,000 in credit card debt, $40,000 loan debt, a $2,800/mo. mortgage payment and $7,200/month net income.
We're looking to get out of debt. What is your opinion of the snowball plan of Dave Ramsey?
Click here to get my free my weekday email newsletter with the latest tips and advice on how to beat debt and do better financially. Subscribe now.
The Dave Ramsey question is a loaded one for me. It's one I often get a lot of very vigorous response or criticism to when it comes up. I think Dave is a nice guy who has developed a mass audience based on his approach which resonates with his audience. But once you get past the fervor, sometimes the math and approaches don't make any logical sense.
Take the debt snowball approach for example. I completely understand his strategy of focusing on the smallest debts first to get you motivated to keep working your way out of debt and free up monthly minimum payments. It is a strategy I suggest to those people if they feel they can't develop a plan and stick to it.
However, it is not the best mathematical approach to reducing debt. The best approach would be to organize your debt according to the highest interest rate and start paying down the highest interest rate debt first. But that's not my opinion alone. World renowned behavioral economist Dan Ariely at Duke University shared the following with me during an interview with him:
"Dan Ariely: It’s a very sad mistake. And actually Ramsey recommending it. So Ramsey is kind of self-finance guru. But he’s recommending what he calls the snowball strategy, which says you close small loans, you’ll get used it and you’ll keep on doing it. We don’t find any evidence for that. We find that this strategy harbors on people’s bad intuitions to finish small loans and they don’t close more loans.
Steve Rhode: You don’t think that knocking off a loan or two gives people an incentive to keep going?
Dan Ariely: We don’t see evidence for this. It could be. We just don’t see evidence for that. Instead, we just see evidence of bad strategy where you teach people here’s what you do. You do the opposite of what’s good."
Besides this one issue I've also been perplexed about Ramsey's negative opinions of credit cards and bankruptcy. The facts don't seem to support his points of view on those subjects either.
And I'm not the only one who has made similar observations. Helaine Olen, author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry" published a number of concerns and observations promoted by Ramsey, Suze Orman, and others.
Personal finance experts can provide general advice and get you pointed in the right direction but ultimately what you need is to determine what is the best solution to use in your current situation to achieve your financial goals. Leaping into a solution without first considering the overall context of your financial life would be putting the cart before the horse.
Getting out of debt involves a number of considerations. We can't just focus on today when getting out of debt, we also have to consider the future as well. For example, if you leapt into a debt snowball approach and had such tunnel vision that your goal was just to eliminate your debt and you did not consider the ramifications of poor savings and low retirement savings, you could be setting yourself up for a big financial fall.
If you need a place to start to get out of debt then I would suggest using my Get Out of Debt Calculator to help you understand your basic options and also read The Saddest Mistake People Make When Getting Out of Debt.
If you wanted to explore some more of my articles that involved Dave Ramsey and the issues I mentioned, you can click here.
Getting out of problem debt is an awesome feeling but finding the balance between life, current obligations, good credit, and future needs is a better approach in my opinion.
WRAL Get Out of Debt Guy
If you have a credit or debt question you'd like to ask about, how to get out of debt, just click here and ask away.
If you'd like to stay posted on all the latest get out of debt news and scam alerts, subscribe to my free newsletter.
I'd love to meet you at the next local Raleigh meeting of the Get Out of Debt Guy Support Group. Everyone is welcome.