I was searching for some financial articles the other day and came across this post on “Five Cent Nickel” entitled, Dave Ramsey is Bad At Math. He compares the debt-relief techniques of two "gurus" and finds that neither of their techniques saves you the most money when paying off of your debts. To pay off your debt in the fastest amount of time (and with the least amount of money) you need to pay off the debt with the highest interest rate first.

Of course, saving a few cents here and there is not the most important thing! The most important thing is paying off those debts!

There are many people selling get-out-of-debt courses, including the above mentioned Dave Ramsey (who's course I just bought on eBay to evaluate for my church).

Let’s take a look at the two major schools of thought on debt-elimination:

A. Debts now, wealth later
  1. This strategy typically has you use ALL available money to pay off debts, then invest the money you were paying towards debts to accelerate your wealth building. Some, such as Dave Ramsey, will encourage you to get a small emergency fund set up first. Others will say just pay the debt first. We will debate the emergency fund in another post (which will be linked when written). Real quick, I’ll say that if you can save $500-$1000 in an emergency fund and not touch it, then do it. I couldn’t- I would always spend it!
  2. The thought is, you’re earning a solid rate of return on your money right now, and then when you pay off your debts have so much extra money you can invest like crazy and build wealth. How are you earning a return now? Well, if your credit card charges you 18% interest rate and you pay it off, it’s like “earning” that 18% on your money used to pay it off because now you don’t have to pay that extra interest. If you put it in the stock market, you’re not likely going to get 18%
  3. I personally like this approach, even though I don’t really like any of the “gurus” teaching it right now, something else we can discuss later. ;-)

B. All in Tandem
  1. This approach says you should take a portion of each paycheck and farm it to multiple streams, including emergency fund, long-term savings, shorter-term investments, and retirement accounts. Oh, and to your bills too.
  2. The thought is, investments work best when you can compound interest over time. You can never get time back, and the $25 you put into your retirement account today will be worth WAY more than the $100 you put into it 10 years from now when you pay off your debts.
  3. The only time I recommend this is when you have a spouse who doesn’t see the need to pay off debts. One client’s spouse would run the cards back up as soon as he paid them down. Over “emergencies.” You know, emergencies like the kids needed the newest Gymbo outfit or they were just going to DIE of embarrassment. His solution? Keep the cards high until the items of value (car, house) were paid off because his wife couldn’t run those back up, and then address the card issue later. It’s amazing what constitutes an emergency until you absolutely have NO money left to spend.

Wow, that was long! Well, I have more to say on this topic but it will have to wait until tomorrow. By the way, if you haven’t done so yet, you may want to subscribe to the new and improved CreditPreacher newsletter. Just email me to sign up.