Why Paying High Interest Debts First Doesn't Work

Summary

In 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

00:00

💳 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.

05:02

📈 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.

Keywords

💡Baby Step Number One

This refers to the initial phase of Dave Ramsey's financial advice plan, which focuses on saving a starter emergency fund of $1,000. It sets the foundation for individuals to begin managing their finances responsibly. In the script, the caller mentions being on this step, indicating they are just starting their financial turnaround.

💡Debt Snowball

The debt snowball is a debt repayment strategy where you pay off debts starting with the smallest balance first while making minimum payments on larger debts. It's a psychological approach to motivate people to stay committed to their debt repayment plan. The caller is advised to follow this method despite its mathematical disadvantages because of the behavioral benefits it provides.

💡Interest Rate

The interest rate is the percentage of an amount charged for its use, typically applied to loans and credit cards. In the context of the script, the caller has credit cards with varying interest rates, and the discussion revolves around prioritizing debt repayment based on these rates, although the advice given is to focus on the smallest balance first.

💡Math Nerd

A 'math nerd' is a colloquial term for someone who is highly knowledgeable or enthusiastic about mathematics. The caller identifies as a math nerd, which introduces the contrast between mathematical logic and the behavioral approach to debt repayment that Ramsey advocates.

💡Behavioral Solution

A behavioral solution addresses problems that are rooted in habits or actions rather than intellectual understanding. The script emphasizes that getting out of debt is more about changing spending habits than about mathematical calculations, which is why the debt snowball method is recommended over the mathematically optimal approach.

💡Success and Motivation

Success in the context of the script refers to the psychological boost one gets from achieving small victories, such as paying off smaller debts. This motivation is crucial for sustaining the effort required to tackle larger financial goals, as illustrated by the caller's journey of paying off debts.

💡Written Budget

A written budget is a plan that outlines expected income and expenses for a given period. It is a tool for financial planning and control. In the script, Ramsey encourages the caller to use a written budget to manage their finances effectively, which is a key component of his financial advice.

💡Every Dollar Budget

Every Dollar Budget is a budgeting app developed by Ramsey that helps users track their income and expenses. It is mentioned in the script as a free tool that the caller is encouraged to use to gain control over their finances and stay on track with their debt repayment plan.

💡Total Money Makeover

The Total Money Makeover is a book by Dave Ramsey that provides a step-by-step guide to financial fitness. In the script, Ramsey offers the caller a copy of the book as a gift, indicating it as a resource to further their financial education and journey.

💡Mortgage

A mortgage is a loan used to purchase real estate, where the property serves as collateral for the loan. In the script, the caller mentions having a mortgage, which is a significant financial commitment that they must manage alongside their credit card debts.

💡Credit Card Debt

Credit card debt refers to the outstanding balance on a credit card that has not been paid off. It is a common form of consumer debt and is a central topic in the script, as the caller is seeking advice on how to manage and eliminate their credit card debts.

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