The realist in me recognizes that the best plan for getting out of debt is any plan that allows someone to achieve that goal. The realist is constantly at odds with the optimist in me, the part of me that wants people to be high achievers, to strive for excellence, and to seek an informed level of knowledge and use that knowledge to make the best decisions for their actions.
The concept of the Debt Snowball always bothered me. In general, paying off any amount of debt with cash flow, whether you follow a specific philosophy, involves three steps.
- Pay the minimum amount due to all debts to avoid accumulation or capitalization of interest.
- Pay any extra cash flow to the one debt you prioritize the highest.
- As you find yourself with fewer minimum payments to make through the elimination of a debt, don’t reduce your total debt elimination payments. Just shift to focus even more on the debt of the next priority.
Dave Ramsey, a very popular personal finance guru who has written several books, sells a seminar called “Financial Peace University,” and has a radio show through which he weaves in “Christianity Lite” into his philosophy, coined the “Debt Snowball” term.
The Debt Snowball plan follows the process outlined above and provides a prioritization plan based on size of debt. The most important debts are the smallest accounts; in this manner, the smallest debts are paid off first, theoretically or allegedly giving those on this path an emotional boost of success, which in turn, theoretically or allegedly provides motivation to continue with the payoff plan.
Here is a more in-depth discussion of the Debt Snowball. And be sure to quickly review where the Debt Snowball fails — the purported “advantages” of the reliance on emotional boost is a disadvantage when time comes for people to stay out of debt once they succeed in paying off debt.
Experts often relate getting out of debt to losing weight. And there’s a good analogy here. The Debt Snowball is like a fad diet. It’s a pervasive philosophy, very popular, and is communicated through a best-selling book (and online classes, in-person seminars, and an array of branded multimedia). People connect with fad diets becauses they tell people what they want to hear. You can eat everything you want, barely exercise, and still lose weight! Read our success stories and view our (Photoshopped) before and after photographs! Likewise, The Debt Snowball tells people they don’t have to change their emotional approach to spending in order to get out of debt.
The path to unmanageable debt is diverse. Households wind up in debt because they habitually overspend on unnecessary items, they have an unexpected hospitalization, they’re victims of a crime or of society, they have an issue with self-control, they have a mental or emotional disorder, or a variety of other reasons. And because these reasons differ, the debt payoff prescription might need to differ.
For emotional spenders, the Debt Snowball deals with the symptoms but not the root cause. Emotional spenders, who are only able to get out of debt when they rely on emotional boosts throughout the debt repayment process, would be more inclined to fall back into old habits after the debt is paid off. Why? Because those habits aren’t old at all. The habits haven’t been addressed and the root cause, for these particular individuals, remains.
I’m happy to see that writers continue to address the differences between the Debt Snowball and other approaches to the prioritization of debt. I compared the Snowball with the Debt Avalanche, as well as with a hybrid approach and an approach that weighs importance on “emotional impact.” All of these should be considered, and there’s a solution for everyone somewhere in the mix.
The Debt Avalanche, a term I coined, describes a debt payoff philosophy that’s been around as long as credit has existed. It’s the mathematical approach to paying off debt, and it ensures that someone who abides by the plan will get out of debt as fast as possible for as little expense as possible.
That, right there, should be the most important emotional impact when it comes to any plan related to money.
You can’t eliminate emotions. All human decisions are made based on emotions, even when they seem logical. The Debt Avalanche doesn’t try to remove the emotional aspect of getting out of debt, it reframes the emotional aspect so that people who practice it get in the habit of making better financial decisions.
If you want to get out of debt, you should want to take the approach that not only gets you there via fastest path possible, the approach that costs the least (after all, this is about money at the end of the day), and that guarantees long-term success with handling your finances (unlike fad diets and their effect on long-term weight management). And that approach is the Debt Avalanche, prioritizing debt accounts by interest rate.
Myth: The Debt Snowball method is better because it emphasizes “quick wins.” Relying on motivation through quick wins is inferior to the motivation one can draw from the healthier knowledge that you would be saving valuable time and money by understanding the mathematics behind debt payoff. If you keep believing the safe, feel-good emotions rule your money decisions, you will continue to make emotionally-driven, potentially dangerous choices when you’re later in a better situation.
Also, there is also scientific study that supports the claim that the Debt Snowball method (the prioritization of debts with the lowest balance first) has a higher success rate than any other designed and coached system or plan.
If you do like the idea of “quick wins” and other psychological tricks, the Debt Avalanche method still pays off better. You still celebrate when you pay off each debt account, and in most situations, that date you pay off that first account would not be all that distant from when it would have been with the Debt Snowball.
You can create your own “quick wins” by setting midterm goals. Choose $100 total paid off, $1,000 total paid off, or $10,000 total paid off as your goal — any amount that is meaningful to you. Yes, it feels good to cut up a credit card when that particular account is paid off in full, and there’s no scientific evidence that particular action or feeling has any long-term effect on anyone’s finances, but you can still take that approach with the Debt Avalanche if it’s important to you!
Celebrate those milestones! If you want an emotional boost to increase your motivation, make your debt pay-off fun. Just don’t spend money to celebrate that would be better spent paying off more debt.
Focus on the the debt payoff goal. Run a quick calculation to determine how much you’ll be saving by sticking to the Debt Avalanche method rather than the Debt Snowball. The amount of time and money you’ll save may not be much. In fact, the financial advantage of the Avalanche over the Snowball would be zero in one specific and unlikely instance, when the list of your debts, from highest interest rate to lowest interest rate, matches exactly the list of your debts from smallest balance to largest. In that case, add to your projected savings the cost of Dave Ramsey’s books that you don’t need to buy. Put your debt payoff date on a calendar and plan to celebrate it like an anniversary.
Don’t forget the real reason. Money management doesn’t exist solely in a vacuum. There are reasons people want to be debt free and to grow their wealth. Having a big number on the bottom of a balance sheet is not one of these reasons. Looking at an ATM receipt with any particular number is not a reason. People want to build wealth so they can live their lives on their own terms with the freedom to spend time and energy doing something meaningful. Getting out of debt is the first step along this road to financial independence.
The Debt Snowball is popular because of the following reasons.
- It’s a contrary approach to logic, and people like thinking there’s something better out there than logic.
- It tells people exactly what they want to hear: you don’t have to change the way your brain works to get out of debt.
- The Snowball is part of a “philosophy.” Those who accept the philosophy see themselves as insiders with core values that don’t exist outside of the “club.”
- The philosophy offers a confirmation of pre-existing notions about the nature of money and the financial industry.
- The movement features an enigmatic leader in Dave Ramsey, a great motivational speaker who earns quite a bit of money from marketing his own brand of math.
The realist in me just wants to see more people get out of debt and understands that any method for doing so is a “net positive.” But when it comes to building financial independence over the long-term, of which getting out of debt is only a part, so much depends on doing more than just the minimum. People must strive for excellence in everything they do in order to see extraordinary results, like financial independence.
The Debt Snowball is a realization of mediocrity. It lets people get away with weak excuses for wasting time and money. That approach says someone doesn’t feel confident enough to take steps towards debt freedom without a “crutch” of quick wins, even though those quick wins aren’t much different emotionally from what you can get out of a superior plan. The quick wins have just been marketed better.
Updated April 3, 2014 and originally published April 2, 2014.