Got a question maybe someone can help me decide what direct to take as it relates to my debt. I currently have some small consumer debt maybe 4K that could easily be paid and a truck and car loan that I also want to attack. However I also have maybe 4 mortgages all under 10K that I really want to get rid of which would free up maybe 1,200 in cash. My Question is should put those loans in the debt snowball or how would you approach this matter. Im really not looking to buy anymore houses unless of course I run across a fire sell.

There are books written on this subject. Credit cards are unsecured loans. Mortgages if not paid, they take your property away.

Rule of thumb, pay off the higher interest debt first.

Years ago when the real estate market was dead, I made low ball offers on three apartment buildings. All were accepted. I closed escrow without a hitch. Then my City, Los Angeles, started the Code Enforcement Program inspecting all of my new units and making me bring them up to high standards within 60 days.

I had already spent my money on those buildings and now has to charge thing on my credit cards to pass the inspections. From having no credit card debt, I know had too much.

So each month I made double the required payments and put extra money towards the highest rated cards. Within a few years I paid off those cards.

Oh my!: you brought up Dave Ramsey on a site about real estate investing!

(*wink)

Okay, I'm a huge Dave fan, as are several others here. While we are in the minority when it comes to the role of debt in real estate investing, with some confidence I can say the majority of us agree non-real estate debt should be paid off ASAP since it's costing you money and the assets are going down in value.

So, you know the Baby Steps, I'm assuming. List debts smallest to largest, regardless of the interest rate and pay the off. So small consumer debt goes first, then whatever the next smallest, etc. Snowball it and finish the job.

Others will say do the largest interest rate first. Okay, fine. We've had those arguments before and I don't get into them any more. But since you asked about Dave Ramsey, I gave you Dave Ramsey's way. I did it personally and it worked for me.

I do use credit card debt to finance my rentals ( I have no W-2 income, spouse with W-2 income wants as much distance from real estate investing as possible,) however, Dave Ramsey is a very wise man indeed. Only credit card debt I have is for my rentals, except some car repair bills for the vehicle I use for rentals, I take standard mileage, so that interest isn’t deductible against the rentals.

I have a Credit Karma account, and through that, I learned that utilization on credit cards is very important for credit score. Utilization is the current amount of debt, divided by the credit limit for that card. My advice would be first to get all utilizations for all credit cards below 30%.

Second, make sure the emergency/ contingency/ major repair fund is funded. This fund could also provide the cash in case that ‘fire-sale’ property comes up.

Last, I would pay mortgages, highest interest rate first. Keep in mind, I have zero mortgages, so this isn’t quite my area. Probably could get a mortgage now, based on schedule E income, don’t want to bother. I would NOT. Pay ALL of the mortgages off. Keep the one with the most time left. My credit score used to be 850, for many years, before I took cash advances on credit cards to buy real estate. Husband was always less. He’s been trying to get 850 just to say he could, but, we have paid off our personal residence, have no car loans, so, he just cannot get there.

No, having a perfect credit score is not a goal (except hubs and I are competitive, so he wants to, since I did.) , but, having good credit affects insurance rates, and provides opportunities. Had I not started out so strong in the credit score area, I wouldn’t have been able to become a landlord, given my husband’s aversion to real estate, and my desire to keep an otherwise great husband.

So, to summarize:

1.) utilization on all consumer debt below 30%

2.) emergency fund/ next rental opportunity fund

3.) Pay some, not all mortgages.

This averse to consumer debt might say switch 1 and 2. That works too.

Ramsey's plan is primarily for people that are very bad with money and have lots of debt. The "Debt Snowball" is a psychological thing for people -- it is done because it helps them stay on track -- not because it is the best financial move.

If you fall into the category of "bad with money and can't seem to get out of debt", then you follow the Ramsey Debt Snowball as Sid described: "List debts smallest to largest, regardless of the interest rate" -- and pay them off in that order.

If you have better control of yourself and your money and are just looking for getting out of debt in a better way, then you list them from highest interest to lowest and pay them off in THAT order.

- John...

I agree with John's analysis of the Ramsey plan.

I said I don't get into arguments over Dave any more, and this may SOUND like I'm arguing with John and WMH, but I view it as a clarification/plea to make up your own mind.

First, it is false to say that Dave's plan is for people who are bad with money. I beg to differ, friends! #1, I'm pretty good with money...we hit Baby Step 7 this year, so if that's "Bad with money"....well...

Also, even if you want to say I'm an outlier or an arrogant, bragging SOB, then just get onto Dave's website and watch hour after hour, show after show where there are doctors, lawyers, business owners, teachers, policemen, firemen, social workers and people from all walks of life WINNING with money. List to his "millionaire hour" and let REAL millionaires tell you their story.

I agree on much of DR's advice but disagree on a few things. His best advice is for folks with regular jobs and consumer debt. For entrapanuers (once out of debt) he's not so great

IMHO. Leverage, in an appreciating market can be a very effective way to build wealth.

I use credit cards. Responsibly. For example, we've been in Sedona for a few days spending money like a fire hose - it's REALLY expensive, and we didn't even buy any of the incredible art. I'd need a wheelbarrow to carry enough cash. BUT I pay my cards off each month. If you can't do that it will bury you.

I know nothing about Dave Ramsey other than what I read on here.

I personally would take the smallest mortgage balance pay that one off. That frees up several hundred dollars a month (you say $1200 so I am generalizing with $300 on each). I'd then use that and pay off another mortgage. I'd pay a little more than the minimum on the credit card but would also quit using it. After paying off two mortgages, you've got $600 xtra cash flow plus the other two mortgages are way down to probably a couple thousand each ... which can be paid off in one or two months with the other mortgage savings.

Do NOT make the mistake I did a long time ago. I paid extra on every mortgage monthly. I had a lot of equity but also still had the same payments monthly.

Sid: I also don't want to argue with you, but I still disagree with you on the semantics. The reality is that his "Debt Snowball" plan IS for people bad with money. It is NOT the best financial move. It is a psychological move for people bad with money.

If you are good with money -- which I think you ARE -- then you would be better off to pay off the highest interest rate debt first. Period. Paying the smaller AMOUNTS first even if they have lower interest is ONLY to give the psychological boost that people get while paying off debt so that they stick to it and feel less overwhelmed and that they are making progress.

If you have the self control to continue doing it without that psychological trick, then you should be paying off higher interest rate debt first.

So, I stand by my statement that Ramsey's plan -- especially his Debt Snowball -- is designed for people that are bad with money/debt and/or lack of self control. Otherwise, you are better off to do it differently.

I hope that, at this point, if you have any debt, YOU are paying off the higher interest rate stuff FIRST -- which, again, is NOT Ramsey's plan.

And, again, I'm not saying it doesn't work for people. Clearly, it does. But that doesn't mean it is the best way to do it from a financial standpoint. Again, it is for a certain (common) personality. But I tend to put MOST LLs outside of that personality. I would put YOU well outside of that personality.

Also, note that I HAVE listened to a lot of Ramsey. It's on the local radio here all the time. I have new ads about to run on the local radio station. (They won't be during Ramsey though -- they are dropping him from that popular time slot because of complaints from too many people that he just repeats the same thing over and over again.)

- John...

And I'm totally with LTD on the use of credit cards. I just did a new AMEX card today. I'll get 150,000 Hilton points for free and pay no fees or interest other than a $95 annual fee. I'll use those points for at least $500+ worth of hotels!

I've done Aruba twice and Bahamas Atlantis once all for near-free thanks to credit card hotel and airline points.

There are simply better ways than Ramsey to treat "debt" (both using it and getting out of it) if you have better self-control regarding money than most of his audience.

He's GREAT for that audience. That is what they NEED to get out of debt. But it isn't "best" for everyone -- by a long shot.

- John...

I'm with you, John. If someone is that undisciplined that they need psychological "tricks" and incentives to manage their money, they probably are not well suited to being a landlord. $1,000 balance at 9%APR, $5000 balance at 23% APR, pay the $1,000 off first? NOOOOOOO.

Dave Ramsey instructor here. Boots on the ground, face to face, pencil in hand helping even rich people get free from the bondage of debt. Over 100 students to date.

If you list your debts smallest to largest and write the interest rate next to each you will most likely find the credit cards are at astronomical rates, the highest rates.

Dave says "How'd you like to make 28% on your money?" Heck yeah! "Pay off your VISA. Read the fine print and see you are paying 28%."

No shame intended, if a person has thousands in credit card debt that person is spending more than they make. Step one to correct.

This whole thing is how one handles the thinking and decision making. I've talked to many folks who tried the highest interest first principle and are still languishing in debt.

I know for a fact the ones who pay off the smallest to largest tend to stick with the plan and even get excited about it, putting more effort to finish the race.

I have never heard a testimony of someone who paid off all their debt by starting with the higher interest rate rate.

As Ms Plenty wisely stated, if your mortgage is aged most of the payment IS principle and very little is interest no matter what the rate.

If a person attacks their debt a few months of interest high or low does not move the needle. But paying off principle on those pesky small debts DOES move the needle.

Daniel, In the end it's YOU that makes the difference. Make a plan and ATTACK it. AMAZING how fast you can be FREE when you put your mind to it.

Biblical:

1. I LOVE the story of the loaves and fishes. Ask God for help and be amazed!

2. Seek wise counsel. Dave's method works.

BRAD

Don, I don't have credit card debt, we pay as we use them - we don't even wait for statements as I download balances every morning. We charge everything: and use them for tracking purpose: we know where we spend every single penny, even $1.45 at 7/11.

Our cars are financed at zero percent interest, so it doesn't make sense to pay them off even though we have the cash to do that.

Brad wrote: "If you list your debts smallest to largest and write the interest rate next to each you will most likely find the credit cards are at astronomical rates, the highest rates."

Right, so most people here would tell you that the best thing to do would be to pay off those highest-rate interest cards first. But what Ramsey's Debt Snowball would tell you to do would be to pay off the SMALLEST AMOUNT first instead -- regardless of the interest rate. (Sid just reiterated that above.) Again, Dave does this for psychological reasons, not "best financial move" ones.

So, Brad, I am curious... When you are teaching your Ramsey classes -- what do you do? When you make that list of debts from smallest to largest and see those 28% credit cards at the HIGH end, do you follow the Ramsey plan and tell them to pay off the smaller debts first and keep those 28% one around until later? Or do you follow the better-financially plan to tell them to pay off those credit cards first even though they are larger balances?

You seem to be arguing for both. You can't have it both ways.

- John...

Your mortgages on rentals are a business expense on your taxes. Your tenants are actually paying for that money you borrowed. Your credit cards are probably the highest interest rate, so you are paying a lot of money for that loan.

I would get rid of the credit card debt first. Now you are also saving that high interest cost. Next go for the vehicles, because they only decrease in value, paying off the loan and putting that payment in the bank gets you a cushion and starting to save for the next vehicle you will purchase if that is your plan.

Paying off the mortgages would be last on my list.

But the key to all of this is to try not to buy anything that you cannot pay for at the next statement. Be honest with yourself when you look to purchase something.... do you NEED it, or want it. Yes, you might want the latest phone, but is yours broken that you need it? Or can you make do for a while. That is where the real discipline comes in.

"I have never heard a testimony of someone who paid off all their debt by starting with the higher interest rate rate."

Then I guess I'll be your first. I had 7 CCs with balances ranging from 600 to 3750. And interest rates ranging from 6% to 28%. They had total debt of 10k.

I took a second job so that I had extra money to throw at them. Then i started With THE HIGHEST INTEREST rate card. I was throwing an extra 600 to 1000 at it for a few months. Then,when that was paid off, I started taking every penny that had been going to them and sending it to the next HIGHEST rate. About a year later, they were all paid off.

Then I started taking two thirds of what had been sent to the CCs and paying that as extra payments towards some personal loans that also had high interest. The other third was directed towards my money market account. A few months ago, the last of those high interest personal loans was paid off and I've been throwing all that money at my money market account. Two small personal loans (apr of 6%) remain but are manageable.

Again, Brad hasn't heard that "testimony" because the people that take Ramsey classes are a certain type of people. It is a common type, yes, but it is not everyone. Again, in my opinion, most people that go into Landlording and would hang out here are a different type that is better with their money.

Ramsey's Debt Snowball works for them because it is designed from a psychological point of view that that sort of attitude/personality needs. Otherwise, yes, they slip into their old habits.

Still doesn't mean it is the best plan for someone that has better self control financially.

- John...

Another vote for make the debt end in zero balance, as WNC mentioned. Amazing how those tiny bits extra add up. Also help me to see if there is something amiss very quickly.

Linda makes good point about deductible interest vs non-deductible. All of my debt is for the rentals, except the car repairs, but those are zero interest, so I didn’t think of that.

Building momentum is very important. I have always been very disciplined with debt, spending, but I still get ‘a boost’ from paying off the smaller amounts.

All the talk about 23% interest? Daniel might not have any that high. I don’t, and I have over 50k in credit card debt., most at zero percent. I believe in having a good credit score (hence, get all utilization’s below 30%, or at least below 50%,) so those low interest rate transfers are available. But, watch the fees. Used to be, I could get a zero interest transfer for 24 months, with zero fees. No more. Now, whether it’s my credit score, or current market rates, about the best I see is zero interest, 18 months, 3% fees. DO NOT , I REPEAT, DO NOT transfer to other cards if it means spending will go up. Again, all of my ‘consumer debt’ is for rental property purchase (cash advance) or repairs. We use credit cards day to day for personal, but those are paid monthly.

I'd pay off everything but the mortgages first, than attack them.

BTW I am turning into a Dave Ramsey fan, in the past 30 days I have cut up and closed two CC accounts because of him. Not all of my cards but I axed a few I don't use anymore.

Why? Killing off cards that you don't use -- assuming that they have no annual fee -- is generally considered a bad idea.

Does Ramsey really recommend that? Getting rid of cards that you don't use any more?

Again, if so, then that is a "psychological" move for people bad with credit. Not the best financial strategy in most cases.

Just FYI.

- John...

I think this website sells a course called Generating Cash Flow.