Dave Ramsey's Debt Snowball Vs. The Highest Interest First Method

Dave Ramsey is a financial counselor, author and talk radio host who has a show on over 350 stations in North America from 1 PM to 4 PM EST 5 days a week. He's written a number of books, has appeared on CBS, is a multimillionaire, and is teaching mathematically incorrect advice. You wouldn't think that someone so successful would offer advice that doesn't put you in the best place as you could be financially, especially since he's teaching millions of Americans how to be better with money for 15 hours a week on the radio, but it's true. Ramsey even freely admits that his method is mathematically incorrect.

He teaches what's called the "debt snowball" meaning, that when paying off your debts, you should list your payments from smallest to largest, and pay minimum payments on all of your debts except the smallest one, which you should attack with a vengeance. Ramsey then says that you should simply go up the list from smallest to largest until all of your debts are paid.

Other financial counselors disagree with Ramsey and argue that you should pay off your debts from the highest interest rate to the lowest interest rate. This means that you'll pay off all of your debt that's charging you a greater percentage of interest first. It will overall reduce the amount of interest that you pay and save you money. So which methodology is correct?

Strictly mathematically speaking, paying the debt with the highest interest rate first makes the most sense. This is where Ramsey's justification on his debt snowball comes in. He contends that there's much more to personal finance than the finance. One of his famous tag lines is that "80% of personal finance is behavior." Ramsey argues that by getting a few small wins under your belt by paying off debts, you'll be further motivated to continue to work hard to get rid of your debt and continue fighting to become debt free.

Ramsey's argument certainly makes a lot of sense, but which method makes the most sense for the average Joe Somebody? It really depends, it's a question of motivation. If you kind of sort of maybe want to get out of debt, then you should definitely use Ramsey's plan so that you can see that it really does work and that you can make your debts go away. If you're motivated like no one else and want to get rid of your debts with a passion, and there's going to be nothing stopping you from do so, the highest-interest first method probably makes sense.

Both way you'll end up out of debt, and the difference in interest that you pay probably will be fairly minimal. It's not a life changing decision, but it is an interesting academic discussion.