The debt snowball, a term coined by personal finance guru Dave Ramsey, is a debt reduction strategy where you take all of your outstanding debts, order them from largest amount to smallest amount, irregardless of the interest rate, and make minimum payments on all of them but one, the smallest. For the smallest debt, you pay extra, as much as you can, until you have paid it off. You then take the payment on that smallest debt, including any extra, and add it to the minimum payment you were making on the next smallest debt, paying that one off as quickly as possible as well. As each subsequent debt is paid off, you “roll” all of the previous extra payments and payment amounts from the paid off debts into the next one, thereby increasing the size of your “snowball”. It is a powerful concept, and seems pretty straight-forward and simple, doesn’t it? Quite a few people disagree with the method, however, claiming Dave Ramsey is bad with math because the smart thing to do would be to pay off your highest interest rate debt first, and the next highest next, etc. Others argue the “psychology” factor of eliminating the number of outstanding debts outweighs the amount of money you may save by paying off the highest interest debt first. So which side is correct?
Neither. A strong argument can be made for either side. It is true, that you will save some money if you pay off the highest interest debt first. But it is not because Dave Ramsey is bad at math. If you are better at math than Dave Ramsey, why are you in debt at all? His method does work, and thousands have followed it to success. Building on small victories (eliminating a debt source) is what the debt snowball is all about. The psychological factor cannot be totally discounted.
The correct answer, is, whatever works best for you.
I have recently, after building up an emergency fund, begun to focus on eliminating my credit card debt. However, I paid off my wife’s student loan last month, because the balance was low and I wanted to eliminate another recurring expense. I am now going to focus on my highest interest rate credit card next. After that, I may go back to paying the smallest balances in order. Seems I am jumping all over the place, doesn’t it? But it really doesn’t matter how you approach your debt reduction or how you order your debt snowball, as long as you have a plan you are comfortable with and stick to it. Tweak it, change it, do it in whatever order you want, as long as it works for you.
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Interesting take on the debt snowball. I’ve got a post coming up tomorrow talking about this exact topic. Sometimes It can be hard to just go with the smallest debt first idea - i think for some people it makes a lot of sense, especially people that have a hard time sticking with debt repayment. for others i might be more inclined to go the highest interest route. It’s hard to say!
@Pete:
Thanks for the feedback. I think you are right, many people feel one way or the other is right for them and feel pretty strongly that way, which ever it is. Look forward to reading your article tomorrow!
The fact that you are making positive efforts to pay off your debt deserves credit. Well Done. You make a very good point and that is that it is up to each individual to find a way that best suits them. The end goal is always the same though - the elmination of debt.
@Until Debt Do US Part- Thanks! Just wish I could do it a little faster-have had a few setbacks lately, but I’m still making progress.
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