Comment by brightball | Hacker News Reader

Comment by brightball | Hacker News Reader

> Before Ramsey’s call-in talk show (“The Dave Ramsey Show”) and his book (Financial Peace) financial advice was largely for people who were already rich. It went straight to stock picks and skipped what to do if you had credit card debt or lived precariously from paycheck to paycheck — assuming people were in those situations because they didn’t care about financial education.

EDIT: Reread the sentence and I realized I misunderstood this the first time. Going to leave the rest of the post around though.

I've read a couple of Dave's books including Total Money Makeover and Financial Peace University.

Dave is most famous for his "Debt Snowball".

1. Save $1,000 for an emergency fund. Use that and not credit cards if something unexpected comes up. Replenish it if you have to use it.

2. Organize all of your debt payments from smallest to largest, then set aside your debt payment budget. Make the minimum payments on everything except the smallest and put the rest of your debt payment budget towards that.

3. When that item is paid off, take the next smallest payment and apply the rest of the debt payment budget to that until eventually you will pay off everything except the house.

4. If you have a new car, sell it and buy a less expensive used car. There's no point in buying new cars and he goes through exactly why.

5. He advocates budgeting in an envelop system using cash because you are more aware of what you are spending when you actually have to hand over cash vs just swiping a card.

6. Don't even think about investing until your debts are paid off (except the house).

None of that is "rich people advice". Yes, there are Biblical references included, specifically a lot of reference to Proverbs 22:7 ( https://biblehub.com/proverbs/22-7.htm ).

"The rich rule over the poor, and the borrower is slave to the lender."

90% of Dave Ramsey is setting forth a good plan for avoiding and paying off debt. Once you have done that, he will talk about longer term advice regarding how to spend your money and save for the long term. Saving for a house, investments, retirement planning, kids college, maintaining your budget, communicating with your spouse about money, working together to decide how to allocate your charitable donation budget.

It's all very safe, good advice.

Thank you for the summary. And, re-read the quote ;-) The author was saying that before Dave Ramsey, financial advice was largely for people who were already wealthy.

Ha! Thanks. Definitely read it that way the first time.

I had to re-read that sentence a couple times too, and I think it would be better if there were a comma after “(Financial Peace)” to separate the clauses. I think the author is saying that financial advice given by others before Dave Ramsey came along was targeting rich people.

Very good summary of some of Ramsey’s big ideas though, thanks!

On #2 What’s the rationale in not paying off the highest interest debt first? And instead go by size. Is it decreasing the count debtors feels better to make a better habit or is there a. Math reason I’m missing?

I don’t read/follow Dave Ramsey, but maybe the best method is to focus on the largest interest payment instead of the largest principal amount. That would optimise for both at the same time.

Mathematically ideal solution vs good enough and implementable now solution.

Smallest debt first is not mathematically optimal but it's more tractable for people. And once you kick the little debts that's only costing you small monthly payments that gives you more financial stability making paying off the other debts easier.

I think it is purely psychological. It feels really good to pay off a debt, and might help people stick to it.

Exactly, the feeling of paying off one debt completely have a momentum building/forward progress to it.

Exactly. Early "wins" make you more likely to stick with it.

The math doesn't work out if you give up before paying off that high-interest debt.

There’s a psychological reason you’re missing: getting to that first debt paid off and experiencing that bit of joy and pride in accomplishment, in order to reinforce new habits.

If the people turning to Ramsey for financial advice were, by and large, analytical types, they probably wouldn’t need to be turning to Ramsey for financial advice.

Would it be better to push more money to a $7000 debt at 7% than a $1000 one at 5%? Analytically, yes.

Is it more likely that someone who had become nihilistic about their financial situation will actually get both of those paid off if they get to see that $1000 account “paid in full” in two or three months? That’s what Ramsey has bet on, and apparently is right about.

A highest-interest-first strategy definitely sounds optimal, assuming one can survive the hurdles during that time period.

For messier situations, I wonder if a better short-term paydown strategy is to maximize liquidity.

E.g., suppose a person's debt is: (a) ($500/month, 3% interest, 3 months remaining) + (b) ($2000/month, 6% interest, 20 years remaining), and they're barely making ends meet each month. Prioritizing the paydown of (a) could eliminate a lot of psychological/financial stress by reducing the risk of a cash crunch.

It would be interesting to do the math on it.

Say you have a debt payment budget of $500 / month for payments of $80, $100 and $200. Also, for sake of the example assume that the amount owed on each is proportional to the payment size (smallest to largest).

You have a total of $380 with an extra $120 to apply to one of the payments. You’ll apply it to the $80 payment until it’s paid off so you’re now paying $200 / month towards it.

Once it’s paid off, you focus on the $100 / month but because the $80 has been paid off you now have an extra $200 / month so you can pay $300 / month today towards it.

Once that is paid off, you can now focus the entire $500 towards the $200 / month payment.

It would be interesting to see some models.

Financial safety is generally more about cash flow than how it’s typically portrayed, and so paying off (even lower interest) smaller loans first increases your resilience to unexpected expenses (because your cash flow is more flexible now).

There’s a psychological reason too (already commented on by others here), but there is a math reason too (cash flow).

It's based on the idea that some sort of reward psychology matters more than perfect maximization, and probably mostly works well because usually larger debts have lower interest rates than smaller debts most of the time. (Not endorsing or rejecting.)

It's psychological — one debt gone is a brick off the mental load, and encouragement to keep going rather than continuing to peck at the mountain. The second-largest then doesn't look so big, etc., etc.

> using cash because you are more aware of what you are spending when you actually have to hand over cash vs just swiping a card

It’s funny how this has flipped over the years. Swiped expenses are permanently there for one to stare at. Cash has already been withdrawn. The additional hit of actually spending it is usually insignificant to folks under 40.

You seem to have read that completely wrong. She's saying financial advice before Dave Ramsey was mostly for the already rich, not that Dave himself gives advice for rich people.

I read that as "typical financial advice was largely for people who were already rich", not Dave Ramsey's financial advice.

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