The Cash Cascade ™

I wrote a series of posts about Dave Ramsey’s Debt Snowball, and have found this great summary / illustration on Blueprint for Financial Prosperity’s blog (does he just sign his checks BFFP to save ink?):

One of Dave Ramsey’s most popular ideas is that of a debt snowball. The idea is that you pay off your smallest debts first, then roll that debt’s monthly payment into the next smallest. When the next smallest is paid off, you roll the two former payments into the next smallest debt.The snowball grows and grow with each debt that’s repaid.

Here’s a real life example; here are your three debts and minimum payments:

  • $10,000 @ 20% APY, $500 minimum monthly payment
  • $4,000 @ 10%, $200 minimum monthly payment
  • $1,500 @ 12.5%, $75 minimum monthly payment + EXTRA PAYMENT

The debt snowball method states that you should put all extra debt payments towards the $1,500 balance. When you finally pay off that debt, your new payment schedule should look like this:

  • $10,000 @ 20% APY, $500 minimum monthly payment
  • $4,000 @ 10%, $200 minimum monthly payment + $75 + EXTRA PAYMENT
  • $1,500 @ 12.5%, $75 minimum monthly payment

I have only added the words “EXTRA PAYMENT” to both examples, because I want to clarify – then expand upon – BFFP’s example.

First, though, what Dave Ramsey is saying – and, what BFFP is trying to illustrate – is the concept that you take one of your debts (the highest interest rate in the traditional ‘Debt Avalanche’ or the smallest balance owing in Dave Ramsey’s more psychologically-friendly ‘Debt Snowball’ method) and pay that down completely … merely making the required minimum payments on any other loans (but no more!) to stop them from going into default.

The credit card companies will love you for this!

Then when that loan is paid off in full you apply the payment that you USED to make on the first loan that you tackled to the next remaining debt, and so on …

… it ‘snowballs’ because you are applying more and more to each remaining debt, while never having to commit more (or less) to debt servicing than when you first started budgeting.

So, in both examples we are paying $775 (i.e. $500 + $200 + $75) towards debt repayment until all debts are paid off … THEN – conventional financial wisdom will tell you – you get to start INVESTING that $775 a month and you are FINALLY debt free and on your way to … what?

Well, let’s go back and make the small correction: if you only make the minimum payments, you will never pay off any of the debts (or, way too slowly), so you need to find some extra money and make some extra payments to the first loan that you decide to tackle; let’s use an example of $225 a month as an extra payment …

… and, from now on you commit to that monthly $1,000 i.e. $500 + $200 + $75 + $225 EXTRA PAYMENT + C.P.I. + 50% of any ‘found money’ (second jobs, part-time business income, loose change, IRS refund checks, etc., etc.) for your entire working life!

So, we are on the road to success! Or, are we?

The problem is that we have to decide where we’re heading: if our aim is to become a Ramseyesque Debt-Free=Happy clone, then well and good. Your financial plan is set.

[sign off now]

But, if we intend to get rich(er) quick(er)™ we have two huge limitations, neither of which the Debt Snowball or Debt Avalanche address:

1. Time to invest, and

2. Money to invest.


We all know the time value of investing early and investing often:

If we lose just 10 years to our investing plan by delaying investing while we pay down ALL of our debt and/or pay down our mortgage we can halve our potential return.

Do you think that might be significant?

So, we don’t want our debt-repayment strategy to unnecessarily delay our investment strategy.


Where are we going to get the money to invest?

Sure we can accumulate $1,000 a month (after paying off debt) – and, grow that amount through C.P.I. and ‘found money’ strategies -but, will that really set us off on the path to financial riches?

The same graph shows that for every $1,000 A YEAR we invest, we can expect $100,000 after 20 years … so, our $1,000 A MONTH strategy should yield $1.2 Million over the same time period … unfortunately, that won’t be enough for a DEPOSIT on the Number that you really need …

… and, inflation will take at least a 50% chunk of that (not to mention taxes)!

So, the solution for most people – who don’t want to lower their expectations to match this depressing, but debt-free (!) scenario – is to move INTO debt … to invest!

This is so-called ‘good debt’ and I’m not sure what Dave Ramsey and Suze Orman’s take on this is, but most financial pundits call it ‘good debt’ for a reason. Assuming that you agree, read on [AJC: if not, I’m guessing that you hit <delete> about 4 or 5 paragraphs ago]

So, here’s what we need …. a different mind-set:

Since we already know that we will more than likely need to incur SOME ‘good debt’ as part of our investment strategy (i.e. some safe level of leverage for investment purposes e.g. a loan on a rental property) …

why pay off OLD debt now in order to accumulate NEW debt later?

It doesn’t make sense, does it?

We merely waste time and money … instead, we should resolve the following:

1. To treat all Consumer Debt as ‘bad’ and incur no further such debt, unless it’s not really Consumer Debt at all (e.g. we need to buy a car to run our catering business, and public transport or a bike really won’t cut it)

2. To apply the minimum required payments + extra payment(s) + c.p.i. + ‘found money’ not merely to the lesser goal of paying down debt, but to the greater goal of helping us get to our Number (i.e. the financial representation of our Life’s Purpose [AJC: if you don’t buy into that philosophy, then simply insert the words “helping us become financially free”])

3. To, from this day forth, look at all debt as an INVESTMENT in your financial future: and, simply ‘invest’ where you get the greatest returns: is that in paying off an old debt? Or, is it in acquiring a new debt?

Example 1

In the example above, we have three debts of 20%, 12.5% and 10% (are they tax deductible? If so, look at the after tax cost which will be 25% to 35% lower than the nominal interest rates circa 14%, 8.5%, and 7% respectively) …

Compare these interest rates to the cost of money for the types of investments that you want to make …

… in this example, all three are higher than current mortgage rates so you will probably want to keep paying them off (although a good argument can be made for paying off the 20% loan first, then buying an investment property BEFORE paying off the others).

Example 2

Let’s make two changes to our example:

Let’s assume that one of the loans is a 2.5% Student Loan, and swap the amounts owing (so that the Student loan is now the ‘biggie’) and, let’s assume that we have at least 5 more years before it HAS to be paid back (so we have time to make an investment work for us); here’s our starting position:

  • $1,500 @ 20% APY, $500 minimum monthly payment + $225 EXTRA PAYMENT
  • $4,000 @ 10%, $200 minimum monthly payment
  • $10,000 @ 2.5%, $75 minimum monthly payment

In this case, we tackle first the 20% loan; I can’t imagine an ‘investment’ that will provide such a quick & safe 20% post-tax return! Then, we tackle the 10% loan.

Again, an argument could be made for leaving it in situ; however, it is only $4k – and, we’ll pay it off in just 4 months – so let’s go ahead do just that:

  • $10,000 @ 20% APY, $500 minimum monthly payment
  • $4,000 @ 10%, $200 minimum monthly payment
  • $10,000 @ 2.5%, $75 minimum monthly payment
  • $10,000 Reserve #1 @ (1%)  + $200 + $500 + $225 EXTRA PAYMENT

See what we are doing?

Once we have paid off our two HIGH INTEREST loans, instead of paying down the low interest student loan, we continue to make its minimum monthly payment, and instead apply all of the previous / extra loan payments (from our OLD loans) to building up a ‘reserve’ in a bank account (it pays us a – low – rate of interest!) …

… at this rate, we will have a deposit on a small rental (or our own first studio apartment) in less than a year, then our financial picture will look something like this:

  • $10,000 @ 20% APY, $500 minimum monthly payment
  • $4,000 @ 10%, $200 minimum monthly payment + $200 + $500 + $225 EXTRA PAYMENT
  • $10,000 @ 2.5%, $75 minimum monthly payment
  • $10,000 Reserve # 1 @ (1%)
  • $40,000 @ 6% FIXED, $240 required monthly payment
  • $10,000 Reserve # 2 @ (1%) + $185 + $500 + $0 EXTRA PAYMENT + $185 Rent

Keep in mind that if you used Reserve # 1 to build up a deposit on a small apartment to live in, then you will have no rent to pay, so you can apply part to home ownership expenses (rates/utilities/taxes) and part towards your next Reserve!

And, if you bought a rental, then you may be in an excess rent situation and have more to apply to building your next Reserve, as well … if not, then you will need to decrease the amount going towards your next reserve to cover any rental shortfalls (e.g. mortgage payment deficits, vacancies, repairs & maintenance fund, etc.).

Now, you know why this is not a Debt Snowball, a Debt Avalanche, or even a Debt Meltdown:

It’s the Cash Cascade …

… the new way to look at paying down debt!

In the two years that it would have taken you to pay off your Student Loan and buy your first property, you now own two properties and are well on your way to financial freedom!

What do you think? Will it work for you?

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21 thoughts on “The Cash Cascade ™

  1. “most financial pundits call it ‘good debt’”

    If I’m not mistaken, most financial pundits are currently hurting terribly from the recession. I believe there is no such thing as good debt, as you will always be at the mercy of those who have lent you money. I believe you fail to take into account the random element of real life. Life never works out as planned, and it cannot be anticipated to be as such. At least with Ramsey’s plan you allow that type of flexibility and peace to be inherent with you.

    My 2 cents.

  2. @ Wes – Touche! So, let me rephrase: Most financial pundits call it ‘good debt’ – when used in MODERATION – because it can be used to buy income-producing / appreciating assets (more, and sooner than you could otherwise buy) PROVIDED THAT you can afford to hold for the llllooooonnnnngggggg term.

    Just my 2,000,000,000 cents 😉

  3. Yeah I’ve long since seen the value in the Dave Ramsey plan, heck we actually used it to pay off our consumer debt, but I must say, Adrian’s plan is the absolute best if your goal is to BUILD WEALTH as FAST as possible and is currently what I’m using.

    Think about it, persona A on the Dave Ramsey plan is moving along paying off debts in smallest to largest fashion and then moves along to paying off their mortgage. They’ve been doing this plan for 7 years and have paid off everything BUT their home, however, they’ve been making extra payments to it for the last couple of years. They even have an emergency fund in place of 3-6 months as Dave suggests(which is just about all they have saved in 7 years). Now on their 10th year, the person loses their job during a financial meltdown/personal catastrophe. This lasts longer than 3-6 months. The bank STILL forecloses on your house and your left out to dry…no “Financial Peace,” and your situation still left you with a new “Total Money Makover”, called losing everything.

    Dave Ramsey himself says “Your only as secure as your ability to go out of the cave, kill something, then drag it back in.” So you see, there’s a bit of fantasy in the idea that a TOTAL debt reduction plan from the beginning is financial security only when you get to YOUR NUMBER by YOUR DATE and move to Money Making 301 can you say you’ve crossed the finish line and can take the foot off the pedal.

    Now person B, is on an accelerated wealth plan, gets out of bad consumer debt as fast as MATHEMATICALLY possible, so they can move on to purchasing income-producing assets as soon as possible(not 10,15, or 20 years from now, the way Dave would have you save up with cash and do). They move along steadily, building a business, buying smaller businesses and real estate with 20% down and low, fixed interest rates(using other peoples money to build wealth exponentially faster at a higher total compound growth rate) and in 10 years they also lose their job……..ON PURPOSE..because when they sell off that business, those small businesses, some of that real-estate, etc..etc.. they have reached THEIR NUMBER by THEIR DATE and are done with the financial rat race. NOW they can pay off the rest of that mortgage, which incidentally is minimal compare to how much they now have in the bank, and be debt free now that they can retire and move onto living their life’s purpose, which doesn’t have to involve working for money anymore if they don’t want too.

    Person A will take another 40 years to even remotely fathom the kind of living and wealth person B has attained at a young age and in 40 years after inflation, person A will find their wealth doesn’t have the buying power that it did 40 years ago, so they go into the sunset with a less than they would have dreamed lifestyle….

    Don’t get me wrong, i’m a Dave Ramsey fan, I’ve read the books and still listen to him on the radio all the time. His message helps a lot of people get out and stay out of debt. But he’s not helping people become rich or wealthy. That requires a different plan.

    Life’s too short to save up safely to 1 or 2 million dollars, 40 years from now when i’m too old to enjoy it and realize that money is now worth 1/4th of what it was 40 years ago…

    I could fail 5 times with Adrian’s plan and have 5 total financial meltdowns in the next 20 years and still end up waaaaay richer and wealthier than if I played it safe the Dave Ramsey way. IMHO

  4. @ Scott and Adiran,

    Fair arguments by both of you! I will choose to devoid myself of ignorance and read up on Adrian’s blog to see his approach. I will follow up with any questions or comments as I read on. 🙂

  5. @ Scott – great summary … actually, yours is the post, mine is the ‘summary’ 🙂

    @ Wes – Seriously, Scott is a guy who ‘gets it’ and I applaud you for at least being open-minded enough to warrant reading further.

    I’m not here to win any converts to some new ‘money religion’: I’m simply here to give some basic financial advice that has been long-missing …. to my knowledge, I am the only multi-millionaire teaching personal finance who made his millions BFEORE he started teaching. I am not sure that the Kiyosakis/Ormans/Ramseys can claim that? If not, then perhaps I do have something worth listening to …?

  6. I agree with Adrian a 100%, thanks for explaining the theory.

    I think a die hard Ramsey listener would be furious at this post, but this post is well said.

    Being a millionaire, I feel that you have the right to explain why Ramsey plan is not solid to building wealth.

    But when you focus on debt you will be debt free and nothing else. If you focus on building wealth, you may can get rid of your debt all as once. Working a job and paying off debt can only get you so far.

    You must take risk.

  7. @ MoneyMonk – You are right … if you follow the Ramsey ‘debt snowball’ or other similar debt reduction programs, you will probably at least stay out of any serious trouble …

    … then again, this blog isn’t called: “How To Stay Out Of Trouble For The Next 7 Years” 😉

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  16. Okay, so I have like $10K more to pay off, I will just continue to have my SLs paid off in the normal manner, and then have about $565 to put into savings…daughter won’t be going to day care by next year…that is another $375.. My oh my! I’ve just freed up $940 for an investment. that’s sad to think I spend that much on debt. *sigh*

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