Dave Says - December 7, 2010 (Dave Ramsey)

Dave Ramsey Homepage ^ | December 7, 2010 | Dave Ramsey

[CSM]

Curious about the debt snowball

Dear Dave,

Why do you recommend paying off your debts from smallest to largest when doing the debt snowball?

Mike

Dear Mike,

This is a really good question! A lot of people wonder the very same thing when I bring up the subject of the debt snowball.

Many folks think paying off the debt with highest interest rate first is the best approach. This seems to make sense mathematically, but I realized a long time ago if those people could do math they wouldn’t be drowning in debt in the first place! Debt is not a mathematical problem, it’s a behavior problem. I’m convinced that personal finance is 80 percent behavior, and only 20 percent head knowledge.

The reason the debt snowball pays off debt from smallest to largest—even though it may be mathematically incorrect—is that modifying your behavior and inspiring your desire to get out of debt is more important than the math. Your probability of becoming wealthy has more to do with your behavior than your financial sophistication or academic pedigree. And besides, I’m a practical application kind of guy—not a theory guy. That’s why my way actually gets people out of debt when lots of other practices fail.

When you pay off a small debt it means you’ve experienced success, and that gives you hope. Then, you move on the next larger debt. When you pay that one off—and you’ve wiped out two debts—it really energizes you. At that point you start to believe in yourself and that you’re on the road to becoming debt-free!

— Dave

Repaid the money, but ...

Dear Dave,

I borrowed money from my parents and paid it back over time, but now the relationship has become very difficult and strained. How can I fix this?

Claudia

Dear Claudia,

If you paid them back, especially if it happened slowly or intermittently over time, there’s really not a lot you can do if they choose to hold a grudge over the situation. Generally speaking, though, it just takes a little time to heal these kinds of things. My guess is they’ll become more and more forgiving as time goes by now that they’ve been paid back.

I’m sorry you have to go through this, but I hope you’ve learned a valuable lesson in the process. Someone who lends money to a loved one has their heart—not their head—in the right place. It’s okay to give money as a gift sometimes, but loaning money to or borrowing from someone you know will usually lead to broken hearts and broken wallets.

The borrower is always slave to the lender, Claudia. Besides, holiday dinners taste better when friends or relatives don’t owe each other money. Eating with your master isn’t nearly as much fun as eating with your family!

— Dave

[CSM]

The borrower is slave to the lender......

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[John Leland 1789]

HEY, FEDERAL GOVERNMENT !!

DEBT IS NOT A MATHEMATICAL PROBLEM, IT IS A BEHAVIOR PROBLEM !!

[Haiku Guy]

I was in a situation where I had borrowed money from a family member, and paid it back, dollar for dollar, as agreed. But it was not really an equitable deal for the lender, because she didn’t make any interest.

So, I sat down and figured out what she would have made if I had been paying 8% for the duration of the loan, and gave her that in cash, not taking no for an answer. It wasn’t that much money, and everybody felt better about the whole thing.

[camle]

what I did was whenever I paid off a loan, I put half of the usual payment into the next load, and splurged with the other half. that way I had the benifit of being to relax and take a bit of stress off, yet I still got ahead on my other loans.
if you don’t get some reward for paying the debt off, you feel like you’re caught in a grind with no escape. you gotta let off steam every now and again.

[MEGoody]

If someone I care about asks to borrow money, I will give it to them as a gift IF the need is real and I have the money available. I refuse to lend it to them.

I have turned family members down who have asked to borrow if I don't believe they've done all they can on their own to resolve the problem.

[RedStateRocker]

Polonius:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Hamlet Act 1, scene 3

[ladyvet]

I have turned family members down who have asked to borrow if I don't believe they've done all they can on their own to resolve the problem.

We just turned down our 28 year old daughter who wanted a loan for school. She makes good money part-time working and seems to be turning into a professional student. Right now she's angry and we don't expect a Christmas card this year....oh well.

[CSM]

That’s called “blow money” and should be part of the budget. It should be planned for, but not a completely re-occuring item.....

[CSM]

Awesome, thanks!

[CSM]

You did the right thing and you have our support. As Dave would say, “would you give a drunk a drink?” No matter how angry your daughter is, have a peaceful mind that you are not enabling her.

[camle]

yes, it provides a morale boost whilst at the same time accelerating the paydown...

[handmade]

Sometimes you just have to take a tough stance. At that age school should be on the individual’s shoulder, not the parents. It is not so much a matter of money as it is helping a person grow up a bit.

[Martin Tell]

That's one of the most quoted lines from Shakespeare, but the author did not intend the "advice" to be read as something to actually follow.

Read the entire scene, starting with Ophelia and Laertes, and ending with Ophelia and Polonius. Then you can understand that Polonius only cares about appearances and advancing the interests of the Polonian family.

"To thine own self be true," also widely quoted, is really a wicked saying, and if followed would leave one with no standards of virtue at all, except naked self-interest.

Polonoius is really an evil dude, probably responsible for Hamlet's non-advancement to the Throne (Polonius was head of the Council), and thus behind the rottenness that Denmark is subject to.

And Polonius got his just desserts - "How now? A rat? Dead, for a ducat, dead!"

[MEGoody]

Right now she's angry and we don't expect a Christmas card this year....oh well.

You did the right thing, though. There comes a time when we have to demand that our kids stand on their own two feet. I imagine she will learn to appreciate that later.

We went through a rough time with our son, but he's a much better man for it and appreciates the hard stance we took at the time. (He didn't really grasp it until he had kids of his own.)

[ladyvet]

Thanks, it is hard even though we know it's the right thing to do. She is single, bar-tends, and will drop in and out of school as the mood strikes. We told her that she needs the responsibility of her own debts.

Funny thing is she is the only one out of five that is like this. The rest are really money responsible. She is also the only one that is liberal. Going to school for “Green Design” ....maybe that has something to do with it.

[kabumpo]

Umm, Shakespeare wrote that not as advice, or to be taken seriously, but to show that Polonious was a cliche-ridden fraud.

[kabumpo]

Thanks, I posted a shorter, less eloquent version of the same idea. Drives me crazy when half-read literature is misused.

[Martin Tell]

Thank you.

I am obsessed with Hamlet. I've seen dozens of productions, but still find the Branagh film version, unabridged of course, to be the best. I watched the first half with my ten year old son last week. Never too early to start with great literature.

And every time I read/see Hamlet I see something new. What a work of genius!

[kabumpo]

I am fascinated by Hamlet also. Have my own crackpot theory about Ophelia and some missing pages.