Don’t Let Dave Ramsey Kill Your Confidence: Being in Debt doesn’t Mean You’re Stupid.
Since I decided to get a super practical degree in English and go to a private liberal arts school, I ended up with a lot of student loan debt. I loved college, but I’d rather not spend half my income every month for the next 12 years paying it off. And I was lucky. I found a job where I write and get paid a decent amount. If I was making minimum wage, I’d probably not need to be making loan payments, but just keep accumulating interest.
Spending most of my days online, I find a lot of interesting information. I was writing for a client in the debt sector last year and I found a lot of articles about strategies for getting out of debt. Of course, I came across the name Dave Ramsey a lot. Lately, I’ve been coming across the name Suze Orman, who no one seems to like.
Dave Ramsey on the other hand, is very popular. He struggled to get out of debt himself, and is now a self-made millionaire with no debt, who likes to make extravagant purchases such as homes in cash. He’s religious enough to advocate tithing, but not enough of an asshole about it to piss off the atheists. Overall, he offers some solid financial advice.
His main selling point is his seven step plan to getting out of debt and establishing a solid financial base for your life. It’s straightforward and reasonable and makes a lot of sense. For the getting out of debt portion, he recommends what he terms the “debt snowball.” This involves organizing your debt from smallest to largest and paying them off in order. You make minimum payments on all of course, but focus any extra money toward the smallest debt. Then you use the momentum from that success and the money you were putting toward that debt toward your next smallest debt. This allows you to build confidence and work your way up to having healthy financial habits.
Many decry this method because mathematically, it’s not the fastest way to get out of debt. That would be the avalanche, where you pay off your debts in order of largest interest rate to smallest interest rate. So you start big, it gets easier along the way, and you end up paying less in interest than you would otherwise. Mathematically it’s sound, but if you’re in a lot of debt because of lack of self control, it can be hard to have the resolve to pay off your debt. The “avalanche” method doesn’t give you little successes early on.
Dave Ramsey argues that people in a lot of debt probably aren’t mathematically minded in the first place. They need those little successes to keep with the plan. Sure, they’d pay it off faster if they paid attention to interest rates, but likely they wouldn’t stick with that method, and they’d end up falling back into bad habits.
As someone whose debt is purely student loans, I resent the idea that debt comes from unhealthy behaviors. Sure, I don’t believe debt is healthy, even student loan debt. I think debt is draining. I definitely believe in living within your means, and if I could do college over again, I would apply for more scholarships and would have put extra money toward accumulating interest rather than going out to eat and buying dresses for dances.
However, I’m not in debt because I’m mathematically stupid (though admittedly, I don’t math extremely well- English Major here). I’m in debt because society told me student loan debt is “normal” and “ok” and even “good debt,” and I was young and ignorant enough to believe it.
So now that I’m more informed and working to get out of debt, what do I think is the best method? Well first, I want to address what I see as a common misconception. The debt snowball and the debt avalanche are usually pitched against each other as opposites. This is a false dichotomy. Here’s how.
The debt snowball starts by paying off the smaller debt and then goes to the bigger ones. The amount you’re applying toward your debt accumulates like when you keep rolling a snowball.
The debt avalanche starts at the top, with the highest interest rate. As you pay off the debts accumulating the fastest, your amount of debt starts to fall, going downward like an avalanche.
The things being measured in each are different. The snowball measures your progress. The avalanche measures your actual debt.
I truly believe that what works for one person won’t work for another. For some, the debt snowball is great because it focuses on the self. It focuses on the psychology. For those who have bad habits to break and want to ease themselves into good habits, the snowball makes a lot of sense.
But for those who want to quit their debt cold turkey, I think it makes more sense to get all of your debt paid off as quickly as possible. And for that, you need to do the avalanche. Map out the most effective way to pay off your debt, set milestones, and then focus all of your money energy into that. Make your own psychological successes. I set a goal to be able to pay off my highest interest loan by the end of this year. Last year, I didn’t meet my halfway point. But I did put a good chunk of money toward that loan. And doing the math now, it’s completely possible for me to meet my goal this year.
I’m using my continual improvement as my motivator. I’m not relying on a zero balance to boost my confidence. I’m looking at the fact that that the interest on this loan is $30 less a month than it was last year, and I’m ecstatic. I’m looking at the fact that my interest payments are making my tax refund quite pleasant, and I’m celebrating that my monthly attention to my loans is rewarding me (with more money to put toward my loans).
I’m looking at the fact that I can be done with my debt before I’m thirty, freeing half my income for travel, for food adventures, and for all sorts of other fun.
Now, I’m not putting off those things completely right now. I definitely don’t want to waste my 20s focused only on money. I eat out every once in a while. I take the occasional road trip. My boyfriend and I go to concerts and movies. We enjoy these things. But we save them as treats. And we cut out some conveniences that don’t significantly contribute to our happiness. We don’t buy into the fact that you have to rack up a lot of debt in order to be happy. Because for us, debt inhibits freedom. So we don’t shackle ourselves to it.
And by focusing on both the now and the future, we can enjoy the best of both.