Does the Dave Ramsey debt snowball technique actually work?

dave ramsey

Most of you have heard of personal finance guru Dave Ramsey, and most of you have heard of his debt snowball tactic. From his website:

Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.

The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior.You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.

But the question needs to be asked: how well-founded is Ramsey’s assertion that paying off the smallest debt first is the best way? You can get anecdotes and metaphors to support any point of view, but is there anything more rigorous underlying Ramsey’s marketing pitch?

I’ll quote from page 66 of Helaine Olen’s Pound Foolish:

When a group of researchers studied the issue for the Journal of Marketing Research, they found a majority of people believed this was the best way to pay down their bills, so much so they will even pay down the smallest debt first after being told of the financial error of their way. “Ramsey may be preaching to the choir”, the paper dryly noted, adding he was promoting “non-optimal behavior”. (It’s worth noting other researchers disagree with this analysis, with two professors at Northwestern University publishing a paper in the summer of 2012 showing, at least as far as the debtors they studied, that building up willpower is more important than the actual numbers themselves.)

Here’s a link to the first paper, and here’s a link to the second, which says:

Our finding that closing off debt accounts–independent of the dollar balances of the closed accounts–is predictive of eliminating debts hints that this intuition [of Ramsey's debt snowball] has a basis in reality. In particular, our findings suggest that, consistent with the recommendations of financial advisors such as Ramsey, maintaining motivation to eliminate debts over a long time horizon might necessitate small wins along the way.

The second paper lends support to Ramsey’s position but is by no means conclusive. Authors David Gal and Blake McShane based their study on “a highly unique data set from a leading consumer debt settlement firm (viz., Freedom Financial Network)”. One subtle problem with this approach is selection bias–the researchers are only able to look at what happened after the fact. The study showed that people who payed smaller debts first did better–but what we don’t know is whether the people who paid smaller debts first are an equivalent population to those who did not.

For example, in theory the population that did not pay the smaller debts first could be a bunch of degenerate gamblers. Or maybe they just had lower income on average.

Or maybe the opposite is true and the debt snowball approach is even better than it appears to be in this study. We simply don’t know that we have an apples to apples comparison.

And to be very clear: this is no knock on the researchers, who in my amateur opinion produced a pretty good paper. Good data is hard to come by for this type of analysis. I can only think of one organization with the resources to do the kind of research that could demonstrate the debt snowball’s effectiveness, and that is the Dave Ramsey marketing machine.

What Dave ought to do is a controlled experiment. This concept is used in medical testing as well as in financial services marketing. He’d want to take a bunch of debtors and divide them into two randomized, equivalent groups. By “equivalent” I mean as equal as possible in terms of demographics, debt, and any factor whatsoever that might influence the outcome. Group A would pursue the Ramsey Debt Snowball while Group B would pursue the high-interest-rate-first approach. At the end of the prescribed period of time, you check to see who’s doing better.

Would such an effort say definitively, once and for all, which approach is better? No. Controlled experiments don’t always give great results. But studying the issue this way works better than more indirect approaches.

Think this is a good idea? Put yourself in Dave Ramsey’s shoes. You run a successful and profitable company, you’ve helped people get out of debt, and you have a great marketing hook with the debt snowball. Would you do an exhaustive and possibly expensive study that risks upsetting your business model, or would you keep doing things the way you’ve always done them?

Free money, $20/$50 at Lowe’s, intrigue at Amex and Suntrust

money for nothing

FREE STUFF AT STAPLES: What’s free at Staples this week? Money, for one:

So you know the drill: buy a couple of $200 Visa prepaids and you’ll come out a couple dollars ahead AND you’ll have the points. Also free this week at Staples: Crayola washable markers, Bic mechanical pecils, and–of course–paper, because this is Staples, and Staples wants everybody to get free paper. Deal details can be found in the Slickdeals thread. And Big Habitat has another idea for how to profit from Staples this week.

$20 / $50 AT LOWE’S: Also on Slickdeals there’s a coupon code 470000RRRR2997R which is giving some people $10 of a $50 purchase. There’s also an Amex Sync deal for $10 off $50: tweet #AmexLowes, or check your offers online in your Amex account. Double dip?

ADIOS AMEX: Some credit card marketing machines are thinning their affiliate ranks. The latest casuality: DeltaPoints.

I have been blogging for the better part of 3 years. American Express has been a huge supporter and partner with Delta Points and I really appreciate all they have done for me and I hope and I know they appreciate all I have brought to AMEX. However, they have decided, at the current time, that Delta Points is no longer a good partner for them. So on Monday morning Delta Points will no longer be able to offer AMEX cards including Delta AMEX cards.

It’s interesting that of all the boardingarea.com bloggers, they cut DeltaPoints loose. How many bloggers are a better fit for selling the Delta Amex? Maybe they just want to work with a few big players? I have no idea what’s going on here. Insert speculation in the comments below, please.

ADIOS SUNTRUST DELTA DEBIT: SunTrust is no longer offering its Delta debit card… or is it?

BITCOIN DEBIT CARD: Apparently there’s a new debit card which will let you convert bitcoins to cash:

Bitcoiners may soon have a new way to use their cryptocurrency in the real world: the Cryptex Card, a new global bitcoin-to-cash ATM and debit card. The Hong-Kong based startup announced on Monday that it will begin shipping its cards in the next four to six weeks.

The Cryptex Card works like this: instead of buying products directly with bitcoin, the cardholder sends bitcoin to an address linked with the card, which converts it to cash. The card can then be used to withdraw money at more than 90 percent of U.S. ATMs or at certain ATMs in 80 countries. The cards are tied to Chinese card provider Union Pay, which lets the debit card work anywhere Discover cards are accepted.

I still don’t see any way to use the Bitcoin phenomenon to get me free points, miles, cash, or Staples printer paper, though.

USAir credit card improves, a guide to stopovers, and Marathon Man speaks


USAIR CARD GETS A LITTLE BETTER:Via Hack My Trip, the Barclaycard USAir card is getting a little better. Starting April 30, cardholders will get 1 free checked bag for themselves and up to 4 companions.

ARCANE FREQUENT FLYER RULES–IN PICTURES!: Travel Is Free has another typically helpful post laying out the quirks of the major airlines’ routing rules. Check this out:

Courtesy of Travel Is Free

Why would you want to do a trip like this? As Drew points out, “A trip to Africa would normally be 80,000 miles in Economy, but by making it a stopover on the way to Japan the price is 70,000 miles. Save miles, see more.”

Incidentally, for those of you who have suddenly found new uses for your Avios, there’s a good TIF post about how to save your Avios by breaking up the trip.

ANOTHER WAY TO MAKE MONEY FROM BANKS: How about buying a cheap bank stock? Oddball Stocks reports on M&F bank, currently valued at 30% of book value.

MARATHON MAN SPEAKS: Food for thought from Marathon Man:

We all want to share ideas and help our fellow MSers, and we all have our own reasons for that. I say, go ahead, share and show… but let’s not be specific about things. If we say a certain card exists that says “debit” on it, we need not tell every little step on how to use it. By now most are in tune with this and those who are not should step up (like we had to) and test things, ask questions or go out and learn too. No room for lazy people. As well, if we discover a certain store or chain starts allowing something, let’s not list the darn details so prevalently! Let’s not put the Google Map address on there either. Let’s not even talk about the store itself, just that a certain type of thing can happen at certain types of places. Again, people can go out and test depending on where they live. The thinking here is that if we push push push and constantly tout all these ways to get something out of these retailers, they may see it as a scam even when it’s not, and the overzealous department heads who are smart enough to use Google and find our writings (and they do in fact show up so let’s not kid ourselves!) will change the rules and gone will be the next best MS thing.

We have to be good stewards or custodians of MS and try to do whatever we can to prolong deals, not let them die quickly because we think a new one will come along soon. We must not think that something new will replace something good. When Coins died, it took a long time for the next thing to happen and many readers may not have been around in those days or in the much darker times of the past to understand this, but it happened then and it can happen again.

CHASE’S MILITARY-SPECIFIC CREDIT CARDS: Just when I thought I was familiar with all of Chase’s credit cards, I learn something new. Military Finance has a rundown on Chase’s military credit card family. I have no idea what an MWR is, but you can get 2% there.