Comments on: Two Approaches to Debt Elimination http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/ personal finance that makes cents Fri, 04 Jul 2008 21:15:16 +0000 http://wordpress.org/?v=2.5.1 By: Peter N Lewis http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-137577 Peter N Lewis Tue, 24 Jun 2008 14:00:41 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-137577 The financial cost (Snowball vs Rational) probably isn't really as much as you might imagine in many cases. For one thing, large percentage loans are probably often the smaller ones anyway, so the two methods will align to some degree. But for amusement sake, I did a rough run of the numbers, assuming the minimum payment was simply the interest (which makes for a minimum payment per month of around $190) and assuming $500/month paid in to debt. The results with Snowball is your first loan paid back after 7 months, as opposed to 24 months for Rational. After 37 months, you have paid all except the college loan on Snowball, whereas Rational would still have two loans (Car & College), but the interesting thing is that you're only about $600 worse off (ie, screwing up for just 1 month would make you about even). So any emotional benefit from Snowball is almost certainly enough to make it the better "rational" choice. The financial cost (Snowball vs Rational) probably isn’t really as much as you might imagine in many cases. For one thing, large percentage loans are probably often the smaller ones anyway, so the two methods will align to some degree. But for amusement sake, I did a rough run of the numbers, assuming the minimum payment was simply the interest (which makes for a minimum payment per month of around $190) and assuming $500/month paid in to debt.

The results with Snowball is your first loan paid back after 7 months, as opposed to 24 months for Rational.

After 37 months, you have paid all except the college loan on Snowball, whereas Rational would still have two loans (Car & College), but the interesting thing is that you’re only about $600 worse off (ie, screwing up for just 1 month would make you about even). So any emotional benefit from Snowball is almost certainly enough to make it the better “rational” choice.

]]> By: Carnival of Debt Reduction » Blog Archive » Flashback: Mind over matter http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-132710 Carnival of Debt Reduction » Blog Archive » Flashback: Mind over matter Sat, 17 May 2008 02:28:51 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-132710 [...] Frugal for Life hosted Carnival of Debt Reduction #34, and this week’s Flashback comes from Get Rich Slowly: Two Approaches to Debt Elimination. [...] [...] Frugal for Life hosted Carnival of Debt Reduction #34, and this week’s Flashback comes from Get Rich Slowly: Two Approaches to Debt Elimination. [...]

]]> By: Omniboy http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-121049 Omniboy Thu, 06 Mar 2008 08:00:10 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-121049 No Financial advisor would ever recommend paying off in this order: (and if they did, ignore them) # 2,000 computer loan at 10% # $3,000 car loan at 4% # $8,000 credit card balance at 12% # $20,000 college loan at 5% 5%apr of 20,000 is more than 12%apr of 8,000. You shouldn't look at the interest, look at the total cost. No Financial advisor would ever recommend paying off in this order: (and if they did, ignore them)

# 2,000 computer loan at 10%
# $3,000 car loan at 4%
# $8,000 credit card balance at 12%
# $20,000 college loan at 5%

5%apr of 20,000 is more than 12%apr of 8,000.

You shouldn’t look at the interest, look at the total cost.

]]> By: Abdurasool http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-89392 Abdurasool Tue, 12 Jun 2007 06:21:07 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-89392 If you are trying to reduce your debts, you need to avoid the Top 10 Debt Reduction mistakes at all costs: www.3debtconsolidation.com/debt-reduction-mistakes.html The first rule is to spend much lesser than you earn, so that you have lots of disposable income left over to pay off any outstanding debts... If you are trying to reduce your debts, you need to avoid the Top 10 Debt Reduction mistakes at all costs: http://www.3debtconsolidation.com/debt-reduction-mistakes.html

The first rule is to spend much lesser than you earn, so that you have lots of disposable income left over to pay off any outstanding debts…

]]> By: Ron Davis http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-83656 Ron Davis Fri, 13 Apr 2007 04:18:02 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-83656 I'm trying to get out of debt and started to track my expenses a lot closer. I tried MS Money to do this and also found this handy web site; http://www.expenseview.com. I liked the site because it was free and it really broke down where I was spending my money. I’m trying to get out of debt and started to track my expenses a lot closer. I tried MS Money to do this and also found this handy web site; http://www.expenseview.com. I liked the site because it was free and it really broke down where I was spending my money.

]]> By: Robert k. Tompsett http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-83329 Robert k. Tompsett Sat, 07 Apr 2007 23:56:12 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-83329 I'm 57, unemployed, looking for work. I owe $26,000.00 in two credit cards a small loan, and my car loan. I just cut up my VISA, and my Pepboys cards. I feel better already. I’m 57, unemployed, looking for work. I owe $26,000.00 in two credit cards a small loan, and my car loan. I just cut up my VISA, and my Pepboys cards. I feel better already.

]]> By: Money Talk 1: Debt » Ed’s Rants and Raves http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-45233 Money Talk 1: Debt » Ed’s Rants and Raves Mon, 15 Jan 2007 04:51:16 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-45233 [...] There are also differing opinions on how to best pay off existing debts.  The mathematical winner is to pay off the debts with the highest interest rates first.  However, despite what my high school math teacher led me to believe, mathematics isn’t everything.  Many times, however, the loans with the highest interest rates are also the largest.  Paying these off first can be discouraging since progress is slow.  Another method that combats this is called the Debt Snowball.  More can be read about it here, but the premise is to payoff the smallest debts first regardless of interest rate.  Then when that debt is paid off, move to the second smallest but use the additional money from the missing debt payment.  By the time the largest debt is being paid off, the extra payments will have ’snowballed’ causing it to be paid off quickly. [...] [...] There are also differing opinions on how to best pay off existing debts.  The mathematical winner is to pay off the debts with the highest interest rates first.  However, despite what my high school math teacher led me to believe, mathematics isn’t everything.  Many times, however, the loans with the highest interest rates are also the largest.  Paying these off first can be discouraging since progress is slow.  Another method that combats this is called the Debt Snowball.  More can be read about it here, but the premise is to payoff the smallest debts first regardless of interest rate.  Then when that debt is paid off, move to the second smallest but use the additional money from the missing debt payment.  By the time the largest debt is being paid off, the extra payments will have ’snowballed’ causing it to be paid off quickly. [...]

]]> By: Get Rich Slowly » In Praise of the Debt Snowball http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-9138 Get Rich Slowly » In Praise of the Debt Snowball Thu, 28 Sep 2006 16:12:04 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-9138 [...] (For more on this, including some actual figures, see my entry on two approaches to debt elimination.) [...] [...] (For more on this, including some actual figures, see my entry on two approaches to debt elimination.) [...]

]]> By: Get Rich Slowly » The Only Credit Card Guide You’ll Ever Need http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-6047 Get Rich Slowly » The Only Credit Card Guide You’ll Ever Need Fri, 25 Aug 2006 20:23:27 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-6047 [...] I have a lot of credit card debt — how do I pay it off? Don’t listen to anyone who tells you there’s only one way. There are a number of approaches, and the important thing is to pick the one that works for you. I’ve written about two popular approaches to debt elimination. Pick the one that works best for your personal psychology. [...] [...] I have a lot of credit card debt — how do I pay it off? Don’t listen to anyone who tells you there’s only one way. There are a number of approaches, and the important thing is to pick the one that works for you. I’ve written about two popular approaches to debt elimination. Pick the one that works best for your personal psychology. [...]

]]> By: Get Rich Slowly » How to Escape from Debt Hell http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-5901 Get Rich Slowly » How to Escape from Debt Hell Wed, 23 Aug 2006 15:09:43 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-5901 [...] Find a system that works for you and focus on it intently. There are many approaches to debt reduction. Do what works for you. If you need a credit counselor to help guide you, find one. If you have the time and ability to work extra jobs, do it. [...] [...] Find a system that works for you and focus on it intently. There are many approaches to debt reduction. Do what works for you. If you need a credit counselor to help guide you, find one. If you have the time and ability to work extra jobs, do it. [...]

]]> By: Get Rich Slowly » Pep Talk: Climb Out of Debt http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-3370 Get Rich Slowly » Pep Talk: Climb Out of Debt Fri, 21 Jul 2006 02:54:43 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-3370 [...] You might notice that there’s some conflicting advice in this thread. “Pay off your highest interest rate debts first.” “No! Pay off your lowest balance debts first.” Etc. Different methods work for different people. Yes, there are theoretical “best methods”, but so what? [...] [...] You might notice that there’s some conflicting advice in this thread. “Pay off your highest interest rate debts first.” “No! Pay off your lowest balance debts first.” Etc. Different methods work for different people. Yes, there are theoretical “best methods”, but so what? [...]

]]> By: Get Rich Slowly » Get Rich Slowly in the Wall Street Journal http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-863 Get Rich Slowly » Get Rich Slowly in the Wall Street Journal Sun, 25 Jun 2006 20:34:47 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-863 [...] You hear me say this often: Do what works for you. There are many personal finance books, and a lot of theories. Some have survived the test of time, but not all of them work for every person. Try what the experts recommend, but if the advice doesn’t help you reach your goals, look for a variation. (For example, I had trouble paying down my debts until I followed Dave Ramsey’s advice to use a Debt Snowball, paying off my smallest debts first instead of those sporting the largest interest rates.) [...] [...] You hear me say this often: Do what works for you. There are many personal finance books, and a lot of theories. Some have survived the test of time, but not all of them work for every person. Try what the experts recommend, but if the advice doesn’t help you reach your goals, look for a variation. (For example, I had trouble paying down my debts until I followed Dave Ramsey’s advice to use a Debt Snowball, paying off my smallest debts first instead of those sporting the largest interest rates.) [...]

]]> By: Get Rich Slowly » How I Choose Personal Finance Books http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-715 Get Rich Slowly » How I Choose Personal Finance Books Tue, 20 Jun 2006 17:38:24 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-715 [...] For years, as I struggled with debt and reckless spending, the only personal finance books that appealed to me were those promising quick riches. A few Christmases ago, after listening to my financial woes, a friend mailed me a copy of Your Money or Your Life. I flipped through it half-heartedly, and then put it on the shelf. It sat there for two years before my debt burden became so overwhelming that I pulled it down and read it. I was impressed. Another friend then recommended Dave Ramsey’s The Total Money Makeover. I put Ramsey’s “debt snowball” method to work, and suddenly saw progress in debt elimination where I’d never been able to succeed before. [...] [...] For years, as I struggled with debt and reckless spending, the only personal finance books that appealed to me were those promising quick riches. A few Christmases ago, after listening to my financial woes, a friend mailed me a copy of Your Money or Your Life. I flipped through it half-heartedly, and then put it on the shelf. It sat there for two years before my debt burden became so overwhelming that I pulled it down and read it. I was impressed. Another friend then recommended Dave Ramsey’s The Total Money Makeover. I put Ramsey’s “debt snowball” method to work, and suddenly saw progress in debt elimination where I’d never been able to succeed before. [...]

]]> By: Get Rich Slowly » Handy Personal Finance Spreadsheets http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-125 Get Rich Slowly » Handy Personal Finance Spreadsheets Thu, 25 May 2006 16:28:57 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-125 [...] If, like me, you’re following the debt snowball method of debt reduction, check out Mr. Peanut’s Debt Snowball Calculator. [...] [...] If, like me, you’re following the debt snowball method of debt reduction, check out Mr. Peanut’s Debt Snowball Calculator. [...]

]]> By: Get Rich Slowly » Best Decisions vs. Financially Smart Decisions http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-11 Get Rich Slowly » Best Decisions vs. Financially Smart Decisions Wed, 03 May 2006 16:12:41 +0000 http://www.getrichslowly.org/blog/2006/04/26/two-approaches-to-debt-elimination/#comment-11 [...] This dichotomy — Best Decisions versus Financially Smart Decisions — reminds me of the Debt Snowball method of debt reduction I described last week in Two Approaches to Debt Elimination. Paying off your debts from smallest-balance to highest-balance doesn’t make the most sense mathematically, but for many people it is the Best Decision because psychologically it provides short term financial victories that lead to long-term financial independence. [...] [...] This dichotomy — Best Decisions versus Financially Smart Decisions — reminds me of the Debt Snowball method of debt reduction I described last week in Two Approaches to Debt Elimination. Paying off your debts from smallest-balance to highest-balance doesn’t make the most sense mathematically, but for many people it is the Best Decision because psychologically it provides short term financial victories that lead to long-term financial independence. [...]

]]>