Financial Tip Friday: The Snowball Method of Paying Off Debt

Financial Tip Friday: The Snowball Method of Paying Off Debt

Paying off debt is one of the most challenging things that a person faces. I certainly have struggled with it over the past year and a half of this blog. So far I have paid off about $40000 in about 20 months. Not bad I know, but I dug myself that hole to begin with so I can’t be too proud of myself.

With the average student loan debt of students being $30000, plus credit card debt, plus a car, plus a potential mortgage it is no wonder why many people struggle with paying off debt. So if paying off debt is something you want to commit to what is the best method to paying it off?

There are a number of methods to paying off debt. There is the debt ladder method, the debt avalanche method, chunking your debt, and other methods. I personally am a debt chunker, but the most effective method is the Debt Snowball.

 

The Debt Snowball Method

You have probably heard the debt snowball method popularized by Dave Ramsey. Mathematically, it might not look like the best, but as Dave says (and I agree with this) personal finance is 80% behavior and only 20% head knowledge. The debt snowball is about changing your behavior.

The debt snowball method is pretty simple. It is essentially where you take all of your debt, excluding your house and put them in order of balance. The interest rate on credit cards DOESN’T MATTER! List them all smallest to largest.

Then when you make your monthly payments on the debt pay minimum payments on all of your debt except that smallest debt and put as much money as you can on it. Obviously, you pay your normal bills first and it is whatever money you have left over. You do this until you eliminate that debt. Then take that payment on the smallest debt and then move to the next smallest. Then when you pay that off you go to the next debt and so forth.

The idea is that by paying off those small debts (e.g. small store cards, maybe some small medical debt, a personal loan, etc) first you gain momentum. The more momentum you have the faster you get out of debt.

Pretty simple, not difficult to master, but highly effective.

How Do We Know It Is the Best?

Well, I am not good at a lot of things in life, but I am pretty good at research. And like a lot of things I do my research. Research studies have found that the Debt Snowball is the best method for paying off debt. The latest one was widely reported in 2012 when researchers from Northwestern University found that Ramsey’s method was the most effective.

Mathematically, the debt snowball isn’t the best method. However, paying off debt is also a change in behavior. Too many people get frustrated by larger debts and don’t gain traction. The beauty of the snowball method is that you gain quick wins that continue your momentum and you begin to change your behavior.

Now none of this works if you just continue your old habits. The key is you need to commit to pay off debt, budget, and change.

The Bottom Line

When you read about paying off debt you will hear about the debt avalanche method, debt snowflake, etc, etc. The Debt Snowball is the best.

 

3 thoughts on “Financial Tip Friday: The Snowball Method of Paying Off Debt

  1. I think you are too hard on yourself. Honestly, the majority of people have debt and while you got yourself in and are currently getting yourself out, give yourself more credit. You are knocking it down quicker than most and educate yourself better than most.

  2. I support the idea of paying off the smallest debt first. It might not be the most efficient, but psychologically it helps with mindset. When you can see a debt disappear, then add more money towards the next debt, it keeps you in the right mindset.

    1. I do think it is the right way to go. You have to be really disciplined to go with the highest interest rate or highest balance. And sometimes it can be so daunting that we give up. Those quick wins do keep people motivated.

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