New and Debt Free! Watching the money pile up!

[Komelika]

Re: New and Debt Free! Watching the money pile up!

I hate to be anal about this, but "calculations" will NOT show this. Calculations will ALWAYS show that the best way to pay off debt is to tackle the highest interest rate first. I understand Ramsey's theory and it might offer some psychological benefits, but it certainly doesn't offer any financial benefit. Bottom line, you WILL get out of debt faster if you pay the highest interest first. Depending on the amount of high interest debt, you might even get out of debt significantly faster by paying higher interest debt first.

I disagree. This is only true assuming that you make the minimum payments on all debts, which would take many many years to pay off no matter which is paid off first for most people. DR's plan includes putting more money toward your debt starting with the smallest first. Any additional money is applied directly to principle and is not effected by interest rates.

I calculated many different scenarios when I started the plan because I was concerned about higher interest debts as well. With the extra money that I sent to my bills the time to total debt freedom was the same no matter which order I paid them off. The benefit to paying off the smallest debts first is completely phsycological; it does not speed up or slow down the process. The only thing that changes the time to payoff is how much extra you put toward the principle. Assuming that your balances don't go up, the length of time to payoff doesn't change if you pay off your debts from largest to smallest no matter what your minimum payments are or the amount of interest you pay.

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

I hate to be anal about this, but "calculations" will NOT show this. Calculations will ALWAYS show that the best way to pay off debt is to tackle the highest interest rate first. I understand Ramsey's theory and it might offer some psychological benefits, but it certainly doesn't offer any financial benefit. Bottom line, you WILL get out of debt faster if you pay the highest interest first. Depending on the amount of high interest debt, you might even get out of debt significantly faster by paying higher interest debt first.

i have run countless calculations myself this past week, and paying my highest interest rate first won't save me the most money. why? my some of my highest interest rates are also my smallest balances, meaning the overall interest they cost me is significantly lower dollar-wise than my lower interest higher balance accounts.

as a previous poster said, i'm also including an extra dollar amount towards debt every month. the first debt i tackle gets my extra $550. when that's gone, the $550 plus the monthly payment on the 1st debt goes towards the 2nd debt. etc.

not that i'm saying paying off one's smallest balance is the most financially beneficial, either. i'm saying it's a ratio of interest rate, balance, and minimum payment amount (because of the snowballing effect).

take my car, house, and a personal loan. house has the highest balance & monthly payment, personal loan has the lowest balance, monthly payment, and interest rate. if i pay them off in order of interest rate (car, house, loan), i'll pay $15,202.48 in interest and it'll take and 66 months. if instead i pay car, loan, house, i'll pay $15,100.21 in interest and it'll only take 65 months, meaning i'm also saving 1 month of a house payment.

if i were just paying the minimum monthly payments and snowballing those, i would still save money paying in this order...

[sparkysgirl]

Re: New and Debt Free! Watching the money pile up!

your post was so inspirational and motivating!! congrats on the new lil one!! and congrats on being debt free!! keep on posting !!

[Komelika]

Re: New and Debt Free! Watching the money pile up!

I found this site last night while browsing and it seems like I may fit in. I found Dave Ramsey back in April about a month before my wife and I found out we were expecting our first. That was a big motivator to get debt free so my wife could be a SAHM. We paid off $34K since April. We were debt free at the end of November and it is true that the money piles up when you have no debt. We already have $2,500 in our FFEF! We should have a complete FFEF by July. It is pretty exciting to know that we'll be contributing to our daughter's college fund by the time she is 6 months old (She is due in January).

Anyway, I know there are tons of ideas out there. Some people advocate debt, some don't. It all depends on your goals and of course your comfort level. I can personally say that DR's plan is solid and worked wonders for us. It is simple, which draws a lot of criticizm, but the beauty of it is that it clearly lists priorities and creates easily achievable goals.

Where ever you are on your financial journey, congratulations, good luck, and hang in there. There is light at the end of the tunnel. See ya on the boards.

Oh yeah, I forgot to mention that my wife's last day of work is January 12th, ten days before her due date. She's going to be a SAHM. I'm amazed by the power of goals.

[lrjohnson]

Re: New and Debt Free! Watching the money pile up!

I hate to be anal about this, but

I'm being anal retentive about this subject.....there's anal retentive and there's anal explosive. Why do people who are claiming to be nitpicky leave off that important part of the phrase? I know people almost never mean anal explosive. But jeez.

[ETA: I'm wrong here, don't retain this. It's not explosive, it's expulsive-not a subtle difference. Plus there is a hyphen. I was busted.]

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

I'm being anal retentive about this subject.....there's anal retentive and there's anal explosive. Why do people who are claiming to be nitpicky leave off that important part of the phrase? I know people almost never mean anal explosive. But jeez.

heheh... i prefer the phrase 'detail oriented'. easily truncated to 'detailed'

[Broken Arrow]

Re: New and Debt Free! Watching the money pile up!

Welcome, Komelika.

This controversy has been rehashed for years now, and although I'm mostly in the pay off the highest interest rate first camp-- because it generally saves the most money in the end-- I have also learned that there are other factors to consider that could sway the decision-- such as how much available cashflow one can free up and how quickly for example.

No one-size-fits-all all the time, eh? But it's good to have lively banter like this sometimes, because it just goes to show how passionate we all are in improving our financial health. And that's what really matters in the end.

[humandraydel]

Re: New and Debt Free! Watching the money pile up!

I'm being anal retentive about this subject.....there's anal retentive and there's anal explosive. Why do people who are claiming to be nitpicky leave off that important part of the phrase? I know people almost never mean anal explosive. But jeez.

Well, I hate to be anal-retentive about this, but it's anal-expulsive, not explosive. Also, notice the hyphen. But jeez.

[humandraydel]

Re: New and Debt Free! Watching the money pile up!

i have run countless calculations myself this past week, and paying my highest interest rate first won't save me the most money. why? my some of my highest interest rates are also my smallest balances, meaning the overall interest they cost me is significantly lower dollar-wise than my lower interest higher balance accounts.

as a previous poster said, i'm also including an extra dollar amount towards debt every month.

I understand exactly what you are doing and I'm telling you that paying off the highest interest rate debt first WILL save you money. I don't care whether you are paying $1 or $1,000 payments, paying the highest interest rate debt WILL save you money. Snowball or no snowball. Depending on interest rates and balances, it could save you a significant amount of money. On the other hand, IF you are willing to PAY money for the psychological benefit of the snowball, go for it.

I don't see why people have such a hard time believing this. If your calculations show otherwise, your calculations are wrong. Honestly, it's as simple as that. I'm not trying to be harsh, but I think it's only fair that people realize that the snowball may not get them out of debt the fastest, even if it does "feel good" to pay off that first low balance debt.

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

please feel free to amortize the numbers yourself if you'd like

CREDITOR - CURRENT BALANCE - APY - MONTHLY MINIMUM PAYMENT
loan - $4,000.00 - 5.90% - $100.00
house - $59,641.00 - 9.25% - $493.00

extra to pay per month (above and beyond current minimum payments) = $550

paying house first = $19,770.06 total interest paid and 76 months till payoff
house ttl amt paid including interest $78,946.12
loan ttl amt paid including interest $4,464.94

paying loan first = $19,750.25 total interest paid and 73 months till payoff
house ttl amt paid including interest $79,319.21
loan ttl amt paid including interest $4,072.05

house payments saved by paying loan first = 3 * $493 each = $1479 saved in house payments

$19.81 saved in interest + $1479 saved on 3 months house payments = $1498.81 total saved paying the low rate personal loan first, not to mention the interest earned stashing the $1479 into savings over 3 months.

[simpleyme]

Re: New and Debt Free! Watching the money pile up!

I am a Dave Ramsey fan ,i like his answer when people start saying pay highest interest first he says something like
" if we were all doing math we never would have run up credit card debt to begin with "

[disneysteve]

Re: New and Debt Free! Watching the money pile up!

CREDITOR - CURRENT BALANCE - APY - MONTHLY MINIMUM PAYMENT
loan - $4,000.00 - 5.90% - $100.00
house - $59,641.00 - 9.25% - $493.00

Very interesting. I've always believed that paying the higher rate first made the most sense. Assuming your calculations are correct (I haven't checked them), that isn't always true.

I guess why it works is this. By throwing an extra $550/month at the loan, you have it paid off in about 6 months. Then, you have an extra $650 per month to put toward the mortgage until that is paid off. During those first 6 months, you wouldn't be saving anything because there is more interest on the mortgage than on the loan. But you catch up eventually with the savings on the mortgage.

Again, very interesting.

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

I guess why it works is this. By throwing an extra $550/month at the loan, you have it paid off in about 6 months. Then, you have an extra $650 per month to put toward the mortgage until that is paid off. During those first 6 months, you wouldn't be saving anything because there is more interest on the mortgage than on the loan. But you catch up eventually with the savings on the mortgage.

Again, very interesting.

that's why i originally said the best payoff method involes a ratio of the initial balance, the interest rate, and what your current monthly payment is. please don't ask me what the ratio is, i've not figured out that part yet but i'm curious enough that'll i'll probably try to figure it out...

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

that's why i originally said the best payoff method involes a ratio of the initial balance, the interest rate, and what your current monthly payment is. please don't ask me what the ratio is, i've not figured out that part yet but i'm curious enough that'll i'll probably try to figure it out...

ok, told you i was curious! from my debts, payments, and interest rates, the lowest payment i have been able to find is when i use this formula:

current balance / (APY * monthly payment) = NUMBER X.

when i rank my debt (including my house, car, CCs, students loans, personal loan) in ascending order by NUMBER X i get my lowest payoff amount in the shortest time period. i don't know if it's because of they way my debts relate to their APYs or payments, or if this is a legitimate ratio.

$27,273.04 in 72 months - paying debts off ranked by ascending NUMBER X
$27,497.30 in 74 months - paying debts off ranked by descending APY

interesting...

[Komelika]

Re: New and Debt Free! Watching the money pile up!

I understand exactly what you are doing and I'm telling you that paying off the highest interest rate debt first WILL save you money. I don't care whether you are paying $1 or $1,000 payments, paying the highest interest rate debt WILL save you money. Snowball or no snowball. Depending on interest rates and balances, it could save you a significant amount of money. On the other hand, IF you are willing to PAY money for the psychological benefit of the snowball, go for it.

I don't see why people have such a hard time believing this. If your calculations show otherwise, your calculations are wrong. Honestly, it's as simple as that. I'm not trying to be harsh, but I think it's only fair that people realize that the snowball may not get them out of debt the fastest, even if it does "feel good" to pay off that first low balance debt.

Hypothetical Question: Say you had an extra $500 per month to put toward debt on top of minimum payments. If you had a credit card with a $2,000 balance @ 5% and a Car loan with a balance of $20,000 @ 8%, would you pay the minimum on the CC until the car is paid off, or would you pay extra on the CC until it is paid off and then attack the car payment?