there is no universal “best” way. Snowball, Avalanche, whatever.

Paying of the RISKIEST debt is the best approach. Sometimes it is the highest interest, sometimes the lowest balance. Sometimes the highest monthly payment. Sometimes it is your family, or the Government.

There are many factors. The number of debts. The payments. The interest rate. The default remedies, the tax deductibility, the creditor type.

For instance, I would always pay the IRS first, because of the default remedies (jail). Same with the Mortgage.

As well, some debts with high interest rates are tax deductibe, lowering the effective rate.

some small debts to family members are more uncomfortabe than a debt to a faceless CC company. Makes Holidays uncomfortable.

A CC with a $100 payment (20% interest) and a $5,000 balance vs. a $650 car payment with a $6,000 balance @ 6%. You can argue all you want about which is “better” For some, it is paying off the CC because of the interest rate. for others, it is the cash flow gained by eliminating the car payment. If freeing up that $650 allows you to accomplish another goal, then that is the correct choice.

I get the math, and I get the arguments, but you all need to expand your thoughts on this subject. The riskiest debts are the ones that most threaten your ability to complete the payoff. Rank them in that order, and you will ALWAYS be right.

Yes, always pay the IRS first. Its penalties and fees are very high and supposedly by law the IRS is not allowed to forgive interest.

Ramsay’s program has merit because for some people just having multiple debts is a problem. They can’t get organized or keep organized. It’s a major relief to this type of person to reduce the number of creditors. They don’t really care if they waste money in paying off their debts, because they’ve already wasted a ton just by getting into debt in the first place. Can you see how Ramsay’s method would hit the right note with them?

I think the rest of you are just totally ignoring the science behind cognitive biases. The human brain is broken.

Psychology can work in different ways. Why wouldn’t one consider the reduction in the amount of money owed or an increase in net worth a sufficient motivator? Personally I don’t understand how can one be motivated by removing one debt when it doesn’t make much of a dent in total amount of money owed? Depending on an interest rate on highest interest debt, it is even possible that while one pays the smallest loan, the total amount of debt increased. How could one be motivated in this case?

I also think Flexo is right about emotions. Learning to think logically about money and learning to count is important. Otherwise, how would this person learn to resist advertising and to think before buying stuff?

“Otherwise responsible people find themselves saddled with a surprise medical bill, for example. ”
I agree with that. I do have friends who encountered this situation. One managed eventually to get most of it paid by insurance that initially refused to pay for a specific type of chemo. Another simply used 0% offers and shuffled the balance from one 0% to another until she comfortably repaid everything. It pays to have good credit – you can take advantage of these 0% offers in case of really expensive emergency. And yes, you are right, my friend had no need or time for motivational speakers, she knew exactly what she was doing. She is pretty well off now with no debt and nice savings – she actually made over 100K on a real estate bubble. This is especially impressive considering she came to the US in 1989 from what then was the Soviet Union with nothing and spent first 7 years working as a live-in nanny during the week and cleaning people’s houses on weekends.

There are also student loans. I heard Ramsey is against those, but without them only kids of rich parents could become doctors.

“Not everyone had a perfect financial literate upbringing. ”
I assure you my friend had no “financial literate upbringing” in the Soviet Union. I grew up there as well and so did my parents, although we immigrated in late 70s. We still were able to figure out when we got our first credit card a couple of years later that if you pay your credit card balance in full by the end of the month we don’t have to pay interest; if you don’t – you pay a lot more. And if we had been faced with debt because of really serious emergency, we’d have paid it highest interest first simply because we don’t like to waste money, and a penny in extra interest is wasted money. As to our “financial literate upbringing” – people got paid in cash in the Soviet Union, used cash to pay bills by standing in line in each appropriate office, then stashed whatever little they had left under the mattress since they didn’t trust government bank. As to my parents who were in their 40s when they came to the US without any English, when they grew up, their parents’ salaries didn’t last for the whole month. My mother told me they were eating bread and onions for last week of the month because they run out of money for food. “financial literate upbringing” is just an excuse.

If emotions helped to contribute to the debt, you don’t want to encourage an emotional solution to getting out of debt, even though that is the most natural answer. Best *financial* decisions are made when emotions are understood and controlled. *Relying* on psychology to get out of debt increases the possibility of getting back into debt due to psychology. Eliminating emotions from reducing debt helps people understand how to work towards eliminating emotions from purchasing decisions as well.

You can still get “quick wins” with the highest-interest-rate-first method, so for those who want the psychology with better math, it’s there.

Many people who choose the Debt Snowball method are unaware that there is a different method that will allow them to get out of debt faster and cheaper, even though Dave Ramsey admits this (in small print…).

Many people who choose the Debt Snowball method do so because Dave Ramsey, a motivational speaker, tells them it has worked for many people (it has) and it will give you the highest possibility of continuing along your progress (debatable).

Self-motivated people should *never* follow the Debt Snowball, and if you want to get out of debt, gaining self-motivation is one of the *best things* you can do to get and stay out of debt.

Some people are in debt not because of emotional spending but out of necessity. Otherwise responsible people find themselves saddled with a surprise medical bill, for example. You can’t assume that this person needs hand-holding to get out of debt; they just need the fastest and most efficient way to get back on track. Chances are, this hypoethetical person doesn’t have time or interest in motivational speakers, anyway.

… when you get down to your lowest interest rate debts, yo STOP an ACQUIRE NEW DEBT!

Crazy? No. The idea is that when the interest rates on yor remaining existing loans are lower than the prevailing interest rates on home and/or investment loans you should and acquire some of this ‘good debt’ and service those with the $575 that we freed up in the example above (keeping the $200 minimum payment in place.

This works particularly well with low interest mortgages and student loans.

@Julie: You make an excellent point about how when you’re under an avalanche of debt, it doesn’t matter which one you pay off first because the psychological factor dominates financial factors.

@Dave: I agree, Predictably Irrational by Dan Ariely is a great book about how we often don’t behave logically.

It is encouraging to pay off any debt when you are buried in debts. We had a student loan, a rental property mortgage, a car loan and we paid them all off using a variant of this system. Mind you, I paid off the highest interest loan off first before tackling the others but I don’t think when you are snowed under that it matters which direction of the submarine of debt, you are eating debt from. Paying off any debt, no matter what the interest rate is – will be productive.

What Dave Ramsey is offering is a system with built in positive reinforcement so that you, the human rat, will continue to do the debt elimination program. It is perhaps not the most logical way to get out of debt and not be a bank slave but I’m out of debt right now (except for my home mortgage that I’m assiduously paying off) and a debt snowball of sorts got us to this point.