How to Pay Off Debt - DO NOT use Dave Ramsey’s Debt Snowball

I’ve been investing for years and I’m $7 to $8 million dollars in debt. Why should you listen to me on how to get out of debt? On top of being $7 to $8 million dollars in debt, I cash flow hundreds of thousands of dollars by using that debt as a tool to make money for me. If you want to learn how that works, check out my other articles. Today we’re going to talk about how you can get out of bad debt. 

There’s good debt that helps you make money, and there is very bad debt. Unfortunately, Dave Ramsey preaches that you just need to stay away from debt in general. I’ve come to find that Dave doesn’t completely believe what he preaches. He does believe his system helps you to get out of debt, but he states in one of his videos that his approach is not the smartest, most efficient approach. It is the approach that helps stupid people get out of debt. 

Dave isn’t stupid, but the method he explains says that he thinks you’re a moron. He thinks the only way that you can pay off debt is with the successes of his “debt snowball,” rather than paying off the debt that makes sense. He created the debt snowball method because he believes that you need to see the success of paying off your smallest debt to propel you into paying off all of your debt. He thinks you won’t understand how to pay off your debt the fastest. His method is to pay off your smallest debts first and then move on to the next biggest debt till you’ve paid off all your debts. 

Here’s the problem with that: it doesn’t consider interest rates. He admits that it makes more sense from a mathematical perspective. Ramsey says that he coached people to pay off the higher interest rate debts first and they wouldn’t do it. So he created his snowball method for people that are simple minded who can only focus on paying off their debt by having little wins along the way. 

I don’t think anyone is so simple minded that they can’t commit to paying off debt the proper way. Here’s a quick example. Say you have a student loan that you owe $20,000 on with a 4% interest rate. You also have $100,000 in credit card debt, with a 24% interest rate. If you followed the debt snowball, you’d be told to pay off the $20,000 first. Whether you had $1000 to put toward the debt or you suddenly had $20,000 to pay off your debt, it works the same. But say you had $20,000 to pay down some debt. If you use that $20,000 to pay off your student loan according to the debt snowball, you’d save yourself $800 in interest for the entire year. 4% of $20,000 is $800. 

Yes, this is a small win that might motivate you to pay off more debt. But here’s the catch that you should understand. If you had taken that same $20,000 and paid it toward your bigger credit card debt with a higher interest rate, that would have saved you $4,800 in interest for the year instead of $800! 

What’s so infuriating for me about this is that by paying off this $20,000 and saving $800 in interest per year, you also just racked up another $4,800 in debt that you have to pay on your credit card debt. You’ve taken two steps forward and a huge step back. That’s interest that’s stacking up that someday you’ll have to pay off. 

This is what infuriates me about Dave Ramsey’s method. He thinks that someone won’t be excited enough about the $4,800 they save because they are going to be more excited about paying off a debt. I applaud him for helping thousands of people pay off their debt. However, if you can find a way to commit yourself to making the financial decision that actually makes sense, you’ll be able to get out of debt so much quicker. 

Once you get out of debt and understand that debt is a tool. It’s like a knife or a gun or anything else that can be used for bad or good. Recognize that once you understand these numbers, and have the self control to use interest and debt properly, you can pay off debt quickly and use that money to invest. You can invest safely, keep reserves, and use debt as a tool to build wealth. 

You can get out of debt the dumb way, paying off smaller loans first with a debt snowball. You can build wealth the dumb way, by not using debt. You can become a millionaire by following Dave Ramsey. I don’t argue against that or negate it. 

If you use debt properly, you can get out of debt and build wealth so much faster. Look at yourself in the mirror and decide if you need the debt snowball. Or do you have the self control to pay off debt in a way that will get you out of debt more quickly. If you can have that self control, I promise you’re going to get out of debt more quickly. You’re going to be able to build wealth much more quickly. 

If you’re out of debt and you don’t have to worry about debt anymore, but you want to build wealth with debt, check out my other articles. I’ll teach you how to use debt and make sure you’re doing it right so you’re never in danger. Understand this tool, the numbers behind it, and have the self control to capitalize. If you use the knowledge properly, you can not only get out of debt but also build a huge passive income for yourself.