Friday, September 8, 2017

Guest Post: "Comparing the Dave Ramsey Method to Others" by Josh Wilson

Hi guys! Today I've got some interesting money facts to share with you, written by Finance blogger, Josh Wilson.

I've written about my own debt journey in the past (And recently discovered Income based repayment that made my student loans affordable!), and I'm always looking into new options that can help me focus on budgeting.

Without further ado:

Financial guru Dave Ramsey has gained a significant following for his no nonsense advice on handling money, particularly when it comes to debt. Ramsey advocates paying off debt using the “snowball” method, which is a strategy that asks users to focus on the debt with the smallest balance first. Other financial advisers claim that the debt “avalanche” method is better, because a person pays off a debt with the highest interest rate first. Both strategies ask users to focus on paying off one debt at a time, and to just pay the minimum on all other debts. So which one is better — the debt snowball or avalanche method?

The Debt Snowball Method

With the debt snowball strategy, championed by Dave Ramsey, you pay off your debts by starting with the debt with the smallest balance and eventually working your way to the debt with the largest balance. The debt snowball method does not require users to pay attention to interest rates; instead, the only concern is which balance is the smallest. Users start by paying off that debt, and once that is paid off, they work their way up their list of debts until they pay off the debt with the largest balance.

The advantage of the debt snowball method is largely psychological. Having debt can be incredibly stressful, and seeing mountains of bills come in each month can be discouraging. When you use the snowball strategy, you eliminate some of these bills fairly easily, scoring quick victories. For example, you may owe $250 on a hospital bill, $5,000 on a credit card, $20,000 on a car loan, and multiple balances of several hundred dollars each on store credit cards. When you pay off your debts from smallest to largest using the snowball method, you may be able to eliminate several of these smaller bills before tackling the larger debts — giving you confidence when it comes time to pay off these bigger debts.

The Debt Avalanche Method

In contrast, the debt avalanche strategy targets loans and debt with the highest interest rates. With that said, it typically targets pesky credit cards, some personal loans, and high interest student loans. This strategy is generally considered to be the best way to get yourself out of debt since it allows you to repay your debt in the shortest period of time. It also saves you the most money on interest. However, it does not give users the same psychological boost because it may take longer to eliminate a debt than with the debt snowball method.

To use the debt avalanche method, simply make a list of all of your debt, ranking it by interest rate from highest to lowest. Then start paying off the debt with the highest interest rate first, making the minimum payments on all of your other debts. Each month, whatever extra money that you have should be devoted towards paying off your highest interest debt. Once you have paid off that high interest debt, you will have even more cash available to put towards the debt with the second highest interest rate, which is what gives this strategy its name: your money will “avalanche” to the next debt, making it that much easier to pay it off.  

While the debt avalanche method typically will result in paying less in interest over time, it can be more difficult to stay motivated when using this strategy because it will usually take longer to pay off the first debt on your list. However, once you have paid off the first debt on your list, it will become that much easier to pay off the remaining debts.

Which Method Is Better?

There is a fierce debate about which method of debt reduction is better: the debt snowball or debt avalanche strategy. Each requires you to focus on one debt at a time, with the main difference between the two methods being the order in which you pay off your debts. The debt snowball method offers the immediate motivation of seeing debts eliminated, while the debt avalanche method has the benefit of helping you pay less in total interest.

If you are working towards getting out of debt, the best method is the one that you will stick with over time. Staying focused on your debt and committed to your strategy are more important than any one particular plan. If you think that it is more important to see your individual debts eliminated quickly, even if you pay a bit more in interest, then the debt snowball method may be the best choice for you. But if you are a numbers person and want to pay less in interest overall, then the debt avalanche is the better choice — as long as you are OK with waiting to pay off that first debt.  

The ultimate lesson: to get out of debt, choose the method that works for you, and stay the course.

By Josh Wilson, a new blogger who made his debut after starting Family Faith Finance. Read his website or follow him on Twitter to learn more!

To inquire about guest posting for The Modern Jane Austen please send your pitch to martin (dot) beks (at) gmail (dot) com. I'm looking for posts on finances, fashion, decorating, recipes, and any tips that would be helpful for people in the 25-40 age range.

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