Two Saturday nights ago I had settled in for a long stretch of great financial television: Suze Orman’s show at eight followed by Gail Vaz-Oxlade’s ‘Til Debt Do Us Part at nine. Suze’s Moneylogue that night was called “Don’t be Debt Dumb”, during which she called out a “so-called financial pundit” she had tuned in to watch on television at an earlier time. Her lip curled and she gritted her teeth in distaste as she recalled literally screaming at this man through her television screen because he was touting “the dumbest debt pay-off strategy” she has ever heard. Listening more closely in between spoonfuls of Blue Bell Chocolate Chip Cookie Dough ice-cream, I was intrigued. Who was this “so-called financial pundit”, this master puppeteer of dumb debt strategy that Suze so disgustfully despised?
As Suze unveiled more details about his debt pay down strategy—pay off the credit card with the lowest balance first, forget about interest rates, psychologically feel good—my eyes widened. Suze never named the man during the segment, but anyone that knows his financial advice could clearly make out who she was referring to: Dave Ramsey.
Suze’s debt pay down strategy is very logical and certainly makes good financial sense. Line up credit cards from the highest interest to the lowest interest. Call your credit card companies to see if you can get interest rates lowered (though she advises that this is not likely they will work with you in the current economy). Try to do a balance transfer from your highest rate credit cards to a credit union card with a much lower interest rate (the most credit unions can charge you in interest is 18% if they are federally chartered; still a whopping figure). Pay the minimum on each of your credit card debts, and then put any extra money onto the one with the highest interest rate card. Once the highest rate interest card is paid off, then you move the money you were putting towards that debt onto the next highest interest rate card, and thus continue with your debt snowball in that fashion.
Dave Ramsey’s Advice
Dave Ramsey is all about behavior modification and the psychological wins. He advises you to list out your debts from the smallest balance to the highest balance despite the interest rates (in fact, in his book Total Money Makeover he states, “I don’t care if some have 24 percent interest and others 4 percent”…the only time to pay off a larger debt sooner than a smaller one is some kind of big-time emergency such as owing the IRS and having them come after you, or in situations where there will be a foreclosure if you don’t pay it off.”) By paying off the smaller debts first and having some big wins in the beginning, you will get “fired up” and be more apt to stick with the program. Just as in Suze’s model, as you pay off each debt (from smallest to largest in balance) you then use the money you were paying towards the debts that are now paid off and throw them at the debt balance that is next in line.
I was a bit taken aback by her attack, quite honestly. I want people to pay off their debts and live debt-free, and how they accomplish this doesn’t really matter to me. The method is not as important as the outcome. Living debt free is an amazing feeling; Paul and I accomplished this (aside from our mortgage) last September using a hybrid approach between Suze Orman’s plan of paying off the loans with the highest interest rate first and Dave Ramsey’s strategy of paying down debt from the lowest balance the to highest balance. Since then we have built our emergency fund up to its fullest, begun investing in an index fund, opened up a “large expense” saving account for things like our next car purchase (not for years hopefully), and opened up a vacation fund. Being debt-free is allowing us to save ahead of every purchase, save up for large expenses, and spend on the things and experiences that we value the most.
We are all different, and what may work for me may not work for you and vice versa. In my opinion, having as many viable and effective options available as possible is best.
Which debt reduction plan do you think is best? Have you used one over the other, or have you used something different? I’d love to hear your thoughts.