A few weeks ago sent me an article on my website on debt reduction that generated an fascinating conversation. It's a honestly standard article on what I thought was a commonly accepted principle. Here's the scenario:

Joe has two credit card balances. One card has a balance of $ 8000 at 19.8% and minimum payments of $ 160 per month. Card B has a balance of $ 6000 at 5.9%, with minimum payments of $ 120 per month. Joe has $ 400 per month to use to pay your credit cards. How should that debt attacking Joe?

The wisest strategy would be to pay the higher interest debt. Any additional dollars available to be applied to a payment card, while only the minimum payment on the card B. Once the debt plus interest is paid, the use of all pay $ 400 to Card B until completion of the repayment of debt. I really do not want to go into math, but if you're interested take a look at this article. The conclusion is that by paying higher debt interest rate first, less money is paid in interest means more money in your pocket. It just so happens to be consistent with my goal of "fattening their pockets."

Well unbeknownst to me, there is a financial advisor and non-well-known, Dave Ramsey, which promotes a different approach. It is recommended that a person pays the balance of the smallest debt first, regardless of the interest rate. From the smallest debts can be paid quicker, a sense of accomplishment is achieved whenever a debt is paid in full. Ramsey believes that from a psychological perspective, increasing the likelihood of sticking to the plot of debt reduction.

By sending the article provoked the following exchange:

Reader:

The article assumes that someone with a credit card debt will make a rational, logical, well thought out choice on how to handle credit card debt. If the person is logical to start with, would never have accumulated debt in the first place. Attacking smallest to largest is a fantastic psychological victory because it is a financial gain. By canceling the debts of small first the person debt is much needed sense of achievement and that eliminating debt is attainable.

So the author of the article is incorrect and most likely jealous of the "experts" Dave Ramsey.

My response:

I am sure that Ramsey has worked with thousands of people in debt and has concluded that paying the smallest debt first can lead to more success. But, I assure you that not managing their own finances that way. Attacking the higher interest debt to invest more money in your pocket throughout the process of debt reduction.

I agree that a sense of accomplishment is very vital in a program of debt reduction. But, compounding errors is not necessarily the wisest approach.

Reader:

I agree with the calculations of attacking the highest interest rate. But, the author of the article (which I've seen elsewhere a couple of times) does not recognize the psychological aspect of why the person finished up in debt, and the need to crawl before running. It ignores the hopelessness many people feel when approaching the elimination of debt, and the initial baby steps needed to start the road to debt elimination. He takes a crack in an ultra-simplistic method that has helped people at least get on the treadmill, sweat and eventually reach a point where they can run a mile without stopping.His approach suggests that it is simple to jump on the treadmill and knock out a run 5 miles, because if you start there, eventually you'll lose more weight (I got into an analogy of weight, but I know).

Certainly part of Dave's plot includes an emergency fund of 3-6 months is suggested to keep cash or a savings account initially, others have said it is in a MMA that check writing privileges. It is suggested that later in the cycle of financial strength.

Anyway, you could say I'm a fan of Dave Ramsey.

My response:

Ramsey apparently made some psychological studies indicate that debt elimination is more likely on small successes by paying the smallest debt first. That is commendable. But, I am more interested in putting more money in my pocket. This is achieved by paying the highest interest debt. You could say I'm in the camp "tough" like.

My answer, after some additional research:

More rambling Ramsey: I have not read any of his books, but I go to Amazon to see his comments. In his latest book, The Total Money Makeover ", which discusses the concept of paying the smallest debt first, respondents gave their 4 1 / 2 to 5 stars. It also ranked 235 in the list of books from Amazon. So, apparently, many people have read and value their work. While reading the reviews, had a couple that caught my attention.

"The step by step guide is simple to know but hard to apply until you're sick and tired of being sick and tired."

"The snowball method of debt repayment is the fastest and least expensive, but is probably the most motivating. If you are self-motivation should pay more attention to interest rates and pay the highest first."

I majored in engineering and had "weed out" courses scattered throughout the program. If you survived one had many more before graduation. I remember in my freshman class of chemistry, on the first day, the professor said look to your right and now look to your left. Only one of the three happen to my class. Some people just got up and left. The debt reduction is equal to that class. It is only the beginning of a long road to financial freedom.

Ramsey's approach can help some people out of debt, but personally, I'm more interested in financial freedom. That requires taking the roads more economically prudent and leaving psychological approaches to others.