Why Paying High Interest Debts First Doesn't Work
Summary
TLDRIn this Dave Ramsey show transcript, a caller on baby step one of Ramsey's financial plan seeks advice on debt repayment. Despite the mathematical advantage of paying off high-interest debts first, Ramsey emphasizes the psychological benefits of the 'snowball' method, starting with the smallest debts to build momentum and confidence. The caller discusses her specific debts, including a high-interest credit card with large payments, and Ramsey provides reassurance and guidance on budgeting and debt elimination.
Takeaways
- 📈 The caller is on 'Baby Step One' of Dave Ramsey's financial plan, which focuses on saving a starter emergency fund.
- 💳 The caller has credit cards with no interest rates for a limited time and others with high-interest rates, including one with a very high balance.
- 📉 Dave Ramsey suggests paying off the smallest debt first, contrary to the caller's mathematical approach of paying off the highest interest rate first.
- 🧐 Ramsey emphasizes that getting out of debt is a behavioral problem, not a math problem, and that small, consistent wins can lead to behavioral change.
- 🔥 The 'snowball' method of paying off debts from smallest to largest is recommended to build momentum and a sense of accomplishment.
- 💡 Success in paying off smaller debts can motivate individuals to tackle larger debts with more enthusiasm and commitment.
- 🏦 The caller has a high monthly payment on one of the credit cards, which is a positive sign as it indicates significant principal reduction.
- 💼 The caller's household income is $109,000, which is a good starting point for managing and paying off debt.
- 📋 Ramsey advises the caller to use the Every Dollar budget app to take control of their finances and allocate every dollar to a specific purpose.
- 🎁 As a new listener, the caller is offered a free copy of 'The Total Money Makeover' book as a Christmas present from Ramsey.
- 🚀 The caller is encouraged to stay committed to the plan, as the momentum from small wins will eventually lead to tackling the largest debt.
Q & A
What is the main topic discussed in the Dave Ramsey Show podcast?
-The main topic discussed is debt repayment strategies, specifically the 'baby step number one' of the Dave Ramsey's financial plan.
What is the 'baby step number one' according to Dave Ramsey's financial plan?
-The 'baby step number one' involves saving $1,000 as a starter emergency fund.
Why does Dave Ramsey suggest paying off the smallest debt first rather than the one with the highest interest rate?
-He believes that paying off the smallest debt first creates a sense of success and momentum, which motivates people to continue with their debt repayment plan.
What does Dave Ramsey consider the root cause of credit card debt?
-Dave Ramsey considers the root cause of credit card debt to be a behavior problem, such as overspending and not being on a budget, rather than a math problem.
What is the significance of the 'snowball method' in debt repayment according to the podcast?
-The 'snowball method' is significant because it allows individuals to experience quick wins by paying off smaller debts first, which in turn boosts their motivation to tackle larger debts.
What advice does Dave Ramsey give for managing a high-interest credit card debt with a large balance?
-Dave Ramsey advises to continue making the minimum payments on high-interest debts while focusing on paying off smaller debts first to build momentum.
What is the importance of having a written budget in the context of Dave Ramsey's advice?
-A written budget is important as it helps individuals allocate their income properly, ensuring that every dollar has a purpose and contributing to debt repayment and financial discipline.
What is the 'Every Dollar Budget' that Dave Ramsey mentions in the podcast?
-The 'Every Dollar Budget' is a free budgeting app and online tool that helps people track their income and expenses, ensuring they live within their means and pay off debt.
What book does Dave Ramsey offer as a Christmas present to the caller in the podcast?
-Dave Ramsey offers 'The Total Money Makeover' book as a gift to the caller to help them get started on their financial journey.
What is the caller's situation regarding their credit card debts and interest rates?
-The caller has four credit card debts, two of which have high interest rates, with the highest balance being $15,000 and the other being $500. The other two debts are without interest until next April.
What is the caller's household income, and how does it relate to their debt repayment plan?
-The caller's household income is $109,000, which is considered good news by Dave Ramsey as it indicates they have the potential to repay their debts quickly if they follow a proper budgeting plan.
Outlines
💳 Debt Management Strategy
In this paragraph, the caller discusses her journey on the first 'baby step' of Dave Ramsey's financial plan, which focuses on saving a starter emergency fund. She has questions about debt repayment, particularly concerning two credit cards with no interest for a limited time and others with interest rates. Dave Ramsey emphasizes that despite the mathematical advantage of paying off debts with the highest interest rates first, his program advocates for paying off the smallest balance first to create a psychological 'win' and motivate continued progress. This approach is aimed at addressing the behavior of overspending rather than just the mathematical aspect of debt repayment. The caller acknowledges her need for financial discipline and the importance of budgeting.
📈 Tackling High-Balance Credit Card Debt
The second paragraph delves into the specifics of the caller's credit card debts, with a focus on the high-balance card that has a significant monthly payment and a 16% interest rate. Dave Ramsey provides reassurance that even with the interest rate, the substantial payments will lead to debt elimination within a short period. The caller's household income is discussed, and it's established that the credit card debts are the primary financial concern aside from a mortgage. Dave Ramsey encourages the caller to continue with the debt repayment strategy, emphasizing the psychological benefits of eliminating smaller debts first to build momentum towards tackling the largest debt. He also suggests using the Every Dollar budget app for better financial organization and offers a free copy of 'The Total Money Makeover' book as a gift for the caller's commitment to financial improvement.
Mindmap
Keywords
💡Baby Step Number One
💡Debt Snowball
💡Interest Rate
💡Math Nerd
💡Behavioral Solution
💡Success and Motivation
💡Written Budget
💡Every Dollar Budget
💡Total Money Makeover
💡Mortgage
💡Credit Card Debt
Highlights
The caller is on 'Baby Step Number One' of Dave Ramsey's financial plan and is considering paying off debts.
Dave Ramsey advises against paying off debts with interest first, emphasizing the psychological benefits of his 'debt snowball' method.
The caller is a math enthusiast but is advised that paying off the smallest debt first is more effective behaviorally, not just mathematically.
Ramsey explains that the 'debt snowball' method creates a sense of success and momentum, which is crucial for changing spending behavior.
The caller has four credit card debts, with one having a very high balance and high interest rate.
Ramsey suggests that even making the minimum payments on the high-interest debt will lead to its elimination due to large principal payments.
The caller's household income is $109,000, and they have no other debts besides the credit cards.
Ramsey emphasizes the importance of a written budget and offers the caller a free budgeting app called 'Every Dollar'.
The caller is encouraged to download 'Every Dollar' and start budgeting to gain control over their finances.
Ramsey offers the caller a free copy of his book 'The Total Money Makeover' as a Christmas gift for being a new listener.
The conversation highlights the psychological aspect of debt repayment and the importance of a behavior solution over a math solution.
The caller's experience with credit card debt is a common issue that many people face, as acknowledged by Ramsey.
Ramsey discusses the concept of 'winning' in the context of debt repayment and how it motivates people to stay committed.
The caller is advised to focus on eliminating smaller debts first to create a sense of accomplishment before tackling the larger ones.
Ramsey uses the analogy of 'shooting the elephant' to describe the final push in paying off the largest debt.
The caller is encouraged to lean in and push through the financial challenges without worrying about others' opinions.
The conversation concludes with Ramsey's offer of support and resources to help the caller on their financial journey.
Transcripts
[Music]
California hi Rene welcome to the Dave
Ramsey show hi Dave good to be here good
to have you how can I help
uh I just started listening to your
podcast and I'm on baby step number one
and so in what I'm doing in parallel is
I just have a question as far as paying
off debt I have two cards that I opened
with no interest rate for a number of
months into next year and then I have
the traditional cards with interest and
one with a very high balance so should I
your your program says pay the smallest
balance off first
yes ma'am should I pay the ones off with
interest now no and then go after it
smaller ones without interest nope nope
you might know why let me tell you why
okay cuz why matters okay it's on I
actually am a math nerd beyond belief
and so if you were a hardcore math nerd
technically mathematically you would
list your debts highest interest rate to
smallest interest rate first and if you
paid the exact same amount on that
program that you paid on the get out of
debt plan that we use smallest balance
the largest balance you would get out of
debt faster because you're not paying as
much interest if you pay the higher
interest off first
and that makes mathematical sense but
what we have discovered is is that this
is not a math problem if you were doing
math you wouldn't have credit card debt
term this is not a math issue this is a
overspending disorganised not on a
budget time to grow up and not buy stuff
I can't afford unless I have the cash
problem yes I've come to have had my
come to Jesus oh man yeah I mean that's
what I had to and it's the same thing
and so what I've discovered over thirty
years of teaching this is
that um if I can get you to believe
because you're having successes that
you're going to win you will work even
that much harder to keep at it than just
the intellectual discussion of interest
rates mm-hmm because it's not an
intellectual problem it's not a problem
of intellect you have the sufficient
intellect to have not done this but you
bought stuff you couldn't afford but I
don't a credit card I did that to all
kinds of stuff I mean how everybody's
done that just about at times so no
shame um not shaming you for that I'm
just saying that so the point is you
don't fix a behavior problem with a math
solution you fix a behavior problem with
a behavior solution and paying off the
smallest one even though it is illogical
will cause you to have more success
because you'll get fired up because
you're having some success it's kind of
like a lot of people go on a diet and if
you let's say you had a diet program one
diet program that was intellectually
correct an extra snot and exercise
program and it was intellectually
correct but you weren't gonna lose any
weight at all for three months and then
in ten days you'd lose thirty pounds no
one would do it because they couldn't
stay with it three months with no
positive feedback but if you go on a
diet that does not work as well and an
exercise program it doesn't work as well
but you lose three pounds the first week
and then two pounds the next week and
then a pound or two the next week you'll
stay with it because you can see the
progress you can feel the progress
you're not having to delay the results
way out there and so that's the reason
that that snowball works and we list our
death smallest to largest because when
you pay off the little one you're like
hey that's cool and then you pay off the
next one's like oh that's very
interesting and then you power for
another one y'all hey this is kind of
working this guy ain't crazy as he
sounds you know and then you pound
another one you like Wow and then you
get an out power for another one you
like I'm never gonna eat again let's do
this my game on you know and the more
you win the more fired up you get and
the deeper you sacrifice and the you
know the less you worry about what other
people think or say
and the more you lean in and push this
through and so that's the reasoning
behind it okay one more question so one
of the credit cards I told you about
weight interest has super high payments
and it's really hard to make sometimes
because I have a mortgage - what is the
net still applied
still applies payments not relevant even
we're gonna pay off the launch - so how
many credit card debts have you got I
have four okay and so two of them are
two of them are higher interest rates
and when I've got a high payment so what
are the balances on the two big ones um
the two big ones is 15,000 the highest
balance is 15 and the second one is
really nominal I just need to pay it off
like 500 bucks those are the cards with
interest and the one if $14,000 $15,000
a month in payment yeah
well that's great news because even if
you don't do anything so just pay the
payment you're gonna get that thing paid
off pretty quick because you're paying
large principal payments if you're
paying $2,000 a month on I mean what's
the interest rate on it 25 no it's 16
yeah okay and so you're gonna pay you'd
pay that off pretty quickly regardless
if you kept paying $2,000 a month
there's two thousand and fifty thousand
and two fifteen thousand is seven and a
half months plus interest so eight or
nine months of $2,000 and that one's
calling anyway mm-hmm even with the
interest so you're gonna get there so
what's your household income got 109
good that's good news okay and how much
other debt have you got other than these
credit cards that's it
okay that's great she got a 14 or 15 a
500 and what's the fourth one the other
two are 45 and 17 and those are I don't
it's like same as cash kind of thing no
interest rate twenty five hundred or
thousand one hundred two hundred and
seventy
hundred oh good okay yeah to be paid off
until next April is there five cards or
four cards four total including the $500
one mm-hmm okay all right so you have
one great big one yeah that's the one
that kicks those kicks my butt every my
hot yeah okay cool
but here's the thing you knock off 500
and then and then 1,700 and then 4,500
you're gonna you're gonna feel like you
got rid of all the mosquitoes that are
flying around and now you just got to
shoot the elephant okay
like you're stomping out the little
stuff so you can focus on the big one
okay and then you'll be able to reach
over and punch him in the head and plus
you get on a written budget you make
enough money to do this pretty quick
I know and I and I started listening to
your podcast so now I'm gonna I don't
know I need to get your book you need to
download the every dollar budget and
start using it and it's free it's a free
budget seven million people are using
the online budget and it's an app and
it'll work on your phone and everything
and it takes about ten minutes set your
budget up and you give every dollar a
name before the month begins and you get
traction and you start to move and hold
on I'll give you a copy the Total Money
Makeover book that'll be our Christmas
present between you and me as a new
listener so we'll get you going here
kiddo hey thank you for the call
Weitere ähnliche Videos ansehen
How Do We Save and Pay Off Debt at the Same Time?
Reserva de emergência para endividados: como fazer
How to Pay Off Your Maxed Out Credit Cards with ZERO Cashflow!!!| @JustJWoodfin
How to Pay Off ALL of Your Maxed Out Credit Cards with NO CASHFLOW!!!
Cut credit card interest costs by exceeding minimum payments
Life Insurance Is NOT an Investment - Dave Ramsey Rant
5.0 / 5 (0 votes)