Doing the Math

Before we started our Financial Peace University class, I decided to look around on the Internet and see if anyone had anything bad to say about Dave Ramsey, as I’d heard praise but no real criticism. One of the first things I found was an article entitled, “Dave Ramsey is Bad at Math.” This article talks about how it’s better mathematically (meaning you end up spending less money) to pay off your debts starting with the highest interest rate, then the next highest, and so on, as opposed to Dave’s plan of paying off the smallest debt first, then the next smallest, etc. The article also mentions a plan by a guy named David Bach, from his book, The Automatic Millionaire. I had actually read this book a couple of years ago, but I couldn’t remember what the debt-reduction plan was that he mentioned. That whole book was about putting all of your bills including house payments on automatic online bill-pay, establishing a retirement account that is taken directly out of your paycheck, and basically having your entire financial life go on “behind-the-scenes.” I’m pretty sure that the idea behind that is that if you have access to the money, you’ll waste it, but if you’ve set yourself up where all the aspects of your life that will lead you to get rich, what does it matter if you waste what’s left? Not too bad, I guess, and Dave’s overall plan also encourages and implements some of these ideas, but the debt-reduction scheme he recommends just seems odd (account balance divided by minimum payment, lowest ratio first), and the book seems to be aimed at people who are doing all right but just aren’t sure how to get rich by retirement. It doesn’t address the bad spending habits and poor choices that probably got us into debt in the first place. Anyway, the point I was going to make is that the “bad at math” article compares the 3 methods (percentage-based, Ramsey, and Bach) and concludes what is, perhaps, obvious: paying off based on interest rate gets you out of debt fastest and cheapest. The problem is, depending on what your debts look like, it may be quite a while before you ever start to feel like you’re making any progress. Whereas, on Dave’s plan, you can usually pay off the smallest debt relatively quickly, and the psychological boost of knowing that you can knock these things out and feeling like you’ve done something early in the process is huge. So, yes, Dave’s plan may not be the fastest, but it gives encouragement quickly, and potentially more often, than going based on percentages alone. Incidentally, nearly two years after the “bad at math” article, the author wrote another one, largely consisting of responses he received. It’s title is: “Dave Ramsey is Good at Psychology.”