Which One of These is the BEST Debt Payoff Strategy?!
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- เผยแพร่เมื่อ 13 มิ.ย. 2021
- Which One of These is the BEST Debt Payoff Strategy?!
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You can’t get the emotional effect in the graph … the snowball method has a strong emotional bump by getting stuff paid off fast.. get you going… “this isn’t a math problem” as Dave says
Stand by for the Dave fans! lol. Unfortunately, I agree with Dave's snowball because poor Abigale would have given up on that 29.99% account because she feels she was getting nowhere. Dave will admit that the "math" agrees with the debt avalanche. But the "behavior" of the debt snowball is what gets you to complete the entire task! Dave will always be king of getting out of debt, Brian and Bo are the best at dominating your financial journey once your out of debt!!!!!! Love the show guys, keep doing a great job!!!
Absolutely agree. If they were avalanche people, then they wouldn’t have the debt in the first place. It’s the hand swiping habit that needs to be changed. Because basic math from elementary teaches people if they have $10 in their account and they spend $40,000 on a new vehicle, that it doesn’t make sense to do. It’s the habit of spending because someone selling you something says you can afford it.
I actually did a mix of these. Started with Dave’s method, built up a little breathing room and corrected my bad habit, then changed to the avalanche method. Debt free before 30 other than mortgage. Completely debt free before 40. Takes time and discipline.
"We're not worthy!"..... this is my exact plan and timeline essentially. Cheers to you.
@@xbetelgeuse128x4 completely disagree. Sometimes your life completely changes and you find yourself in a position to focus on finances.
Dave is for quitters or people who fall in the face of adversity. Dave is also for people with low intelligence. If you are smart you would pay less interest and make better investments than daves sponsored mutual funds
Y'all have grown a lot since a last saw the channel by like 33% great job
34%
much better than the video you guys released on Friday, taking out the different kinds of debt. much better and not a waste of time TY
Nice job gentlemen!
I feel like this was a really contrived example and you locked in the outcome by setting the assumptions.
In reality, 4 or 5 years is a LONG time to get out of debt. In many real world scenarios, both of them would likely give up along the way. The theory behind the snowball is that you’re getting very intense about paying off debt, and by knocking out the quantity of debts faster, it reinforces that intensity. With that mentality, he’d be paying more than $200 extra each month (or she could as well).
But by locking in the behavior as a given in your model, you eliminated the entire advantage of the snowball method in that it changes behavior.
Some people are different. And the point of this wasn’t to study the human condition but different strategies given good execution
Jazz wealth managers love the cup you gave them! 😂
The second cc rare is extreme. I hope many folks don’t have balances carrying at that rate. In the examples the debt amount per are pretty close, and definitely close enough to evaluate the effectiveness of the avalanche vs snowball and recognize the 28 & 18% interest differentials which should prompt nearly anyone to forego the pure snowball method.
Part of Ramsey’s plan is to be much more aggressive paying off debt than $200/mo for 4-5 years. He would be pushing for $500/mo or more to knock these out more quickly, and that does reduce the differential impact across the interest rates, tho here 30% int is still significant enough to be addressed first, IMO.
I can confirm there are A LOT of people who have both that rate and the balance. I work at a non-profit helping young service members with finances. It's tough to watch someone who is only 20-22 y/o and they are in these scenarios. It happens way more often than you think. Miss a payment and it starts to get worse. Most don't have a large enough shovel to throw more than the $200/mo. If you are unable to change your salary significantly it may take every bit of that time in order to pay off that debt. Dave Ramsey has a place but I do believe these guys and this channel is a much better approach to financial well being. They've said it themselves before I believe that their focus is more so on those who don't carry debt.
I’ve been paying stupid tax on a lot of years of bad decisions… right now I still have a $3,000 balance at 29.9%, and a $5,500 balance at 24%.
Now I know that’s insane but honestly before I had more financial education, I thought that was completely normal.
Thank you for the videos you put out, y’all. I’ve been binging you, Caleb Hammer, and Ramsey shows for a few months now and I’m digging myself out of this hole!
I"m not in debt and have fortunately never struggled with over-bearing debt, just dumb decisions I fortunately had a big enough shovel to dig out of pretty quickly. I do however talk with young service members everyday and unfortunately a lot of them carry a ton of debt. This is great information to share with them. This is nothing against Dave Ramsey but to be honest, his approach can be a little off-putting and you two in my opinion are filling a void in which can be more helpful. I look forward to your new material and continue to fill my tool bag with the knowledge and research to be more helpful those I work with. Keep up the great work!
Ready for this? Since they did not give the term, I had to assume 5 years on the retail loan. If so, The Snowball would take 39 months, and cost $26,941. Because the credit cards interests are so high, I had to assume a 3% balance payment. Avalanche would take 35 months and pay $24,188.65. But the difference in the first fully paid off debt is 6 months earlier.
One thing not factored in to the example, that the debt snowball has going for it is, as you pay off one debt, you can add that debt's monthly payment to the next smallest debt and so on, until you're paying the last debt with the minimum monthly payment plus the extra $200 per month (per this example) plus the minimum payments for all other debts you already paid off. When you do this it is typically more advantageous to do the snowball method, as paying off the small debts first can very quickly get the monthly payments larger and the speed at which you pay off debt will just continue to increase. You can do this with the avalanche as well, but depending on the balances of the high interest debts, it may take a while to get to a point where it would make a difference.
Yes and I wonder if they included the extra payments after a debt was paid off. I don’t think they did and that’s a big part of the snowball. My take away is unless you have a debt that’s at an extremely high interest rate, both paths work about the same.
@The Money Guy Show, what is a interest rate that is considered high interest debt? I have a student loan at 6.3% interest rate & I am trying to figure out wether to pay that loan off this year or to invest the additional cash that I would've thrown towards this loan.
Im curious.....why not pay off the one with the highest interest accruing each month not just the highest or lowest interest rate?
Seems like the one growing the fastest is the one to tackle first...why attack the papercut when you have a hemmorage?
This is a somewhat contrived scenario. Placing the largest debt on a loan with such outrageous interest drastically tilts the scenario in favor of the avalanche approach.
Yes, in general, mathematically speaking, the avalanche will save money, but in most real world scenarios, it's nowhere near enough of a difference to compensate for the improved cash flow options and motivation gained from eliminating small debts quickly.
In my personal case, my highest interest debt is my home mortgage but it's was only a point higher than my car and my boat loans were at the time with the mortgage at 4.75% and the car and boat each at about 3.5%. Had I started with the mortgage, both the car and boat would've been paid off naturally well before the time it will take to pay off the mortgage first using only the extra money, so I would've gained very little interst and time advantage by doing so and I would've lost the cash flow options I gained by no longer having a car and boat payment. Lastly, I would've lost out on how much motivation and pride I felt in paying off the car and the boat. By paying off the car and the boat first, I was out of those bad debts within 1 year, and was even more motivated for the long haul on the mortgage because the size of the extra payment I was putting on it was over 3X larger than the extra due to the fact that the rather sizable car and boat payments were now on top of the extra going into the mortgage. While I will wind up paying off the mortgage about a month or two later than I would have using the avalanche approach. Had I gone after the mortgage first, it would've required a lot more discipline, plus, I would've lost the cash flow flexibility I gained by paying off the smaller debts first.
I think in most people's cases, they have a lot of smaller debts on multiple credit cards and a few large debts. Each debt that gets paid off provides additional cash flow flexibility more quickly that puts you in a better position to handle emergencies that you otherwise might have to resort to credit to handle. If those smaller debts also happen to have the highest interest rates, great, then it's a win-win, but you can't discount cash flow flexibility in your analysis and you need to add several smaller debts in the sub $1000 range to make your scenario more realistic IMO.
The Snowball Method can be good in certain situations for a quick cashflow/flexibility/psychological boost. Avalanche is probably better in 80-90% of cases. I will say that the example in this video is a fairly extreme one in favor of Avalanche but I get why they did that.
Credit score improved faster snowball
Truth. Dave Ramsey, the biggest proponent of the debt snowball technique, readily admits that mathematically the fastest way to get out of debt is paying the highest interest rate first. He just treats it as a motivational problem more than a math problem
The best debt strategy is to never get into debt to begin with. The Dave Ramsey method ignores math and assumes you do not have the willpower to stick with a sensible plan.
Bingo. Ramsey's thought is that if you end up $19K in the hole and have only got $200 to chuck at it - the APR isn't that important - your feelings of winning at money are more important. So beating something - anything - to get the rush of a win is what keeps you in for the slog that paying the debt off will be.
At what interest rate do you consider high interest debt?
I thought this was going to go over an actual study to determine which method had a better real-world outcome. Not just theorycraft math.
It’s a useful illustration.
Except that the primary argument against the avalanche method is that the solution to debt payoff is one primarily based on behavior, rather than just being a math problem. So when I saw a title about a “case study”, I thought they had data to show which was actually more effective in the real world rather than a completely hypothetical situation that could be straight out of a low level math textbook.
I have 29.99% APR on my secured quicksilver card. lol Good thing I don't carry a balance or I'd die in interest.
You do " plastic surgery" and cut up those credit cards, I like that analogy a lot better.
At first I thought Sam was giving the finger. 🤪
Credit cards that have that high of interest rate probably won’t have a $7500 credit limit. Those are cards for those with terrible credit, so the limits would be in the hundreds not thousands.
Credit card APRs can range from 15-26% so that’s in the middle. Besides, credit limit is based more on your income while interest rate is based more on your credit score. You can have both a high income & bad credit score.
I wouldn't be so sure of that. For example, my Amazon account (Amazon does it through Synchrony Bank) has an APR of 28.24% and my credit limit with them is $8500. Now I'm not stupid enough to actually run up an $8500 bill with them but the possibility does exist. Currently my balance with them is about $3k but only about $400 of that am I actually paying interest on. The rest of my balance is all "no interest if paid off within X amount of time" for which I fully expect will get paid off. Some places just give shit interest rates to people even who have good credit scores. The key is not to get sucked in to how big of a hole they will let you dig
Have you heard of the Armageddon debt payoff method?
Yes it’s coming soon cause of Biden lol he’s gonna crash the market
Best way to get out of debt is to not get into it in the first place.
The best way to not be hurt in a car wreck is to not have a car wreck in the first place rather than trying to buy a car with extremely good safety. How many people buy cars based on safety ratings and still get hurt every single year?