Dave Ramsey is well-known as a proponent of the “debt snowball” method. And because of his popularity, many personal finance writers tend to recommend that strategy for figuring out how to pay off your debts (with some exceptions). The idea is that you pay off your debts in order of the smallest balance first. As a debt is paid off, you tack on the payments you were making on previous debts to the next one in line.

The problem is that many people (including Dave) tend to recommend this as the best strategy for everyone. And they have good reason – because you get a few quick wins at the beginning, many people tend to stay motivated enough to pay off the rest of their debts. The theory is that psychology wins out over mathematics. But the flaw here is that not everyone is psychologically motivated in the same way.

#### Not Everyone Needs Quick Wins to Stay Motivated

The assumption behind recommending the debt snowball as a blanket strategy for debt payoff is that most everybody needs some quick wins in order to stick with something. And I agree that this is true for the most part. People tend to give up easily on a goal if they don’t see progress. The debt snowball method sidesteps that problem by giving you some apparent progress very quickly.

But not everyone is motivated by quick wins. Some people, like me, want to know that they are making the right decision mathematically. That is, they want to do something because it’s the best way – not just because it feels good. When it comes to paying off debts, the debt snowball method is mathematically inferior to paying off your loans in order of highest interest rates first (the debt avalanche method, as some have called it). Even Dave Ramsey concedes that the debt snowball is not mathematically best. Assuming you stick with it all the way through, highest interest rate first is always the fastest and cheapest (least amount of interest paid) method for paying off your debts.

Let me give you a quick example. Assume you have the following debts:

• Debt 1: \$2,000 – 13.00% interest rate – \$60 minimum payment
• Debt 2: \$5,000 – 20.00% interest rate – \$150 minimum payment
• Debt 3: \$10,000 – 4.00% interest rate – \$100 minimum payment
• Debt 4: \$17,000 – 16.00% interest rate – \$510 minimum payment

This seems like a reasonable mix if Debts 1 & 4 are credit cards, Debt 2 is a store credit card (after the promotional period expired…), and Debt 3 is a student loan. Assuming you continue paying only the minimum payments, it’ll take you 10 years and 2 months to pay off all this debt.

Now let’s say you have an extra \$300/month to put toward paying off your debts. If you use the debt snowball method, you’ll pay them off in the order I listed them (1, 2, 3, then 4). It’ll take you 3 years and 1 month to do and you’ll pay a total of \$6,990 in interest.

But if you pay off the highest interest rate debts first (debt avalanche), it will take you 3 years even and you’ll pay a total of \$5,996 in interest. You’ll get out of debt one month quicker than the debt snowball method AND pay almost \$1,000 less in interest! That’s enough motivation for me, and I’m sure there are others who would prefer it as well.

#### If You Need Quick Wins, You Can Still Use the Highest Interest Rate First Method!

Proponents of the debt snowball method insist on its psychological boost as being key to its success and popularity. It’s the only reason to push it harder than the smart method (highest interest rate first). But it’s not a very good reason because it’s not exclusive to the debt snowball method.

If you need quick wins to motivate yourself but you don’t want to follow a mathematically inferior method (that is, a stupid method), then you can create your own psychological motivation by setting milestones for yourself. Plan to celebrate when you’ve paid off \$500 in debt, \$1,000, \$2,500, \$5,000, and so on. Recognizing your progress and celebrating it can give you a boost and help you keep going without paying more interest than necessary.

#### Another Problem with the Debt Snowball

Personally, I think the debt snowball method tries to cover over a deeper problem inside that needs to be dealt with. If you can’t control your emotions enough to make a smart, rational decision in your finances, you risk falling into the same traps that got you into debt in the first place.

The debt snowball doesn’t force you to deal with this issue until later if ever. Even it’s gradual benefits (quick wins first followed by a slower pace to the finish) can be replicated by combining the highest interest rate method with personal milestones. So even its psychological benefits are limited.

#### Most of All, I’d Rather You Be Successful than Right

Although I would never personally use the debt snowball method, I would rather you use it than not if that’s what you need to successfully pay off your debts. If you can’t sufficiently motivate yourself with personal milestones so you’ll stick to the highest interest rate first method, then you might not follow through with it. And even though it’s mathematically the best method, it’s not going to be very good if you don’t finish.

What I’m trying to say is that the highest interest rate first method isn’t the best for everyone either. And even though I don’t know why not everyone can use it, I’m willing to admit that it may be better to use something else. I’ve even suggested that you might want to pay off your debts in order of highest stress level first. The best method for you is whatever gets you to your goal – being debt free.

But it is important to realize that you’re paying more and taking longer if you use any method besides highest interest rate first. That fact is enough to make the debt snowball method absolutely wrong for some people because they want to know they’re making the best, most rational choice (even if they’ve made mistakes in the past). So don’t assume that the debt snowball is the best method for everyone just because it works for Dave Ramsey, or some of his “followers”, or even you. It’s all going to depend on each person’s particular psychological makeup.

(photo credit: kamshots on Flickr)

#### Corey

Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

### 9 responses to The Debt Snowball Method Is Not the Best Way for Everybody to Pay Off Debt

1. “Personally, I think the debt snowball method tries to cover over a deeper problem inside that needs to be dealt with. If you can’t control your emotions enough to make a smart, rational decision in your finances, you risk falling into the same traps that got you into debt in the first place.”

I don’t know if this is a matter of “right / wrong” or preference. For example, the strictly math people used to strongly suggest keeping a largest low-interest mortgage that you could afford on your house because it was easy to get 10% returns in the market. (“used to” – as that doesn’t sell so well any more)

Anyway…there is a valid point in understanding your own psyche and working with it. But I agree with the point you make. Most of these get out of debt strategies do little to deal with the underlying cause of the debt.

How do I become the kind of person who doesn’t respond to 90 days same as cash gimmicks? How do I become the kind of person who does not buy things based on emotional adds that create a false need? How do I become the kind of person who doesn’t buy something to make-up for some hidden lack that I can barely perceive?

There is nothing wrong with making purchases beyond the necessities and enjoying the fruit of your labor. But the fact is, most of us struggle with some sort of unspoken internal lack, and marketers find a way to speak to it and get us to buy. The reality is that what we buy may temporarily fill the lack, but in the end leaves us in the same place but with less money and more stuff.

2. I also loved the same paragraph that Kevin commented on. It was the crux of your post. Thanks for writing about this!

My husband and I were in a Dave Ramsey class and chose to pay our debt the “debt avalanche” way instead. At first glance I suffered some cognitive dissonance, because I thought “Dave Ramsey is a well-educated, Christian finance guy. If he says this is the best way, it is, right?” However, he is addressing his message to an audience that most likely does have deeper emotional reasons for persistent debt.

Once I mathematically figured the difference between the “debt snowball” and “debt avalanche” methods, we used the latter, and it saved us over \$1,000.

Great post!

3. I wouldn’t say you should always go with the math, Kevin. One thing people tend to forget when looking at the mortgage/stock market question is the fact that it’s difficult to compare the two rates of return. Paying off your mortgage is a guaranteed rate – you know exactly how much interest you’re saving. The stock market has no guaranteed rate of return. You’re just making an assumption based on historical data. Now, I don’t think that means one or the other is always the right decision – personal situation plays highly into this. But it should spark a light bulb that says, “Wait a minute. This isn’t as simple as it appears.”

Regarding becoming a different person and not getting sucked into marketing created “needs”, you and I both know the answer. Contentment in Christ and an eternal perspective dramatically changes your value system. It requires intense focus and a complete surrender to God’s will, but I know of no more powerful force to combat consumerism and the stupid financial decisions it leads to.

4. Thanks, K! I think the dissonance you experienced is understandable. Dave is seen as an authority, and we often find it difficult to question authority. The Stanford Prison Experiment is a good example of this. I’m glad you did the math and made it work for you. The numbers don’t always work out with such a large difference (though it could be much larger), but you’ll never be behind by using the highest interest rate first method.

5. Excellent article. I enjoy Dave Ramsey’s material as a general focus on getting out of debt and how to budget etc. I agree with your thoughts here. Dave says though that if you were using math you wouldn’t have gotten into debt in the first place. but i think the concept of deciding to make a new direction (no more debt!) and focusing on getting and staying debt free should be enough motivation and focus for some. So i really like the idea of doing the smartest way to get out of debt which would be the highest interest rates first generally. There is some value in getting rid of some small ones if it frees up the minimum payment amounts from them but i personally did the highest interest rate first and was glad i did!

thanks for the article!

Ken

6. Thanks for commenting, Ken! I think the value people see in getting rid of small debts and freeing up the minimum payment is really only perceived value. It could be beneficial in case your income is reduced because you’ll have a lower total required payment for your debts. But as far as paying off the debt goes, all that really matters is how quickly you pay off the debt and how much interest you pay. In that case, it doesn’t really matter if you clear out the small debts first – interest rates are the primary concern.

I’m glad to hear you got out of debt and were able to make the mathematically better way work for you!

7. I totally agree. I recommend that if you can keep up the debt repayment, you are better off getting out of debt faster and paying less interest!

8. Thanks for your comment, Barb!