Dec 2nd, 2007
The Debt Snowball; does it make sense for you?
In my previous post on paying off debt, one of the things I suggested was prioritizing what you would pay off by the interest rate and tax deductibility involved with each loan or debt. While this is the method I prefer (and would advise most people to use), there is another method that has gained some notoriety: the debt snowball.
The snowball method has gained fame from financial guru David Ramsey, whose Financial Peace book is in our library. The idea behind the debt snowball is to try and gain momentum on paying off your debt by putting emphasis on your smallest debts first and eliminating them. Instead of prioritizing your debt by interest rate, you prioritize them by dollar amount. Pay the minimum amount to each of your debts except for the smallest one. That debt gets all of the money you can spare. Once that debt is eliminated, put all of that money into the next smallest debt, then the next, until you finally eliminate all of them.
The big advantage of the snowball is psychological; seeing the smaller bills go away completely tends to give an emotional boost to the debtor. It lets the person who has dug themselves in a hole see a bit of a way out, an as those smaller debts disappear, they may see things more and more optimistically.
Critics would argue that this actually does not contribute to paying off debt quicker; attacking the highest interest rate debt first as in my earlier post would be the more mathematically sound method of attacking the debt monster. For the disciplined, that’s unquestionably true, but the facts are that if someone were disciplined, they’d not likely end up in the debt situation and that getting into debt is largely psychological and emotional, so getting out of debt is also psychological and emotional.
The snowball method may not be the most mathematically sound way of paying off debt, but due to its popularity many have tried it, some with great success. It may not be the perfect solution, but it also may be the best one for you.
[...] finance blogosphere recently about snowflaking, which is a technique used widely to help build up debt snowballs, a debt payoff technique discussed in a previous post. The idea behind snowflaking is to put any amount of “extra” money you come into on top [...]
[...] Put the majority of your positive cash flow into paying down–and paying off–that debt. Consider the Debt Snowball or some of the other options we’ve written about previously. If you’ve chosen to [...]