A fellow blogger wrote about the debt snowball. For those of you who do not know what the debt snowball is, it’s a method of paying one’s debt off (a good thing) ordered from lowest balance to highest. I wrote about this over 7 years ago when I was Thinking about Dave Ramsey. In that article, I was trying to keep an open mind. I’ll even suggest that for the lost few hundred dollars, if the good feelings you get from knocking off the first card help keep you going, a few hundred, or even a thousand dollars might be a small price to pay for long term success. In my opinion, the fastest way to eliminate all one’s debt is simple – make all minimum payment due, and send any extra money to the highest interest debt. Others insist on the snowball good feelings.
But. As a numbers guy, I ask, “Where do you draw the line?” And toward that end I wrote to Derek, the blogger I mentioned –
“I don’t dispute that killing off a card completely can provide an emotional reward, a boost to one’s feeling of accomplishment, etc. But, I often say “knowledge is power” and one should know the cost of that decision. A few hundred dollars over 4 years? No big deal. Thousands of dollars? Look carefully at the numbers before choosing the method.
Consider – ‘snowballers’ suggest you pay your 8 student loans, all zero interest, $10,000 each, before paying that $20,000 18% card. Of course, that’s an exaggeration, but one that easily illustrates why it’s important to look at the numbers.”
What I expected was an acknowledgement that there are some extreme, contrived, cases when you just pay off that 18% debt first. Nope. His response?
“I used to be like you – a hard-nosed financial professional that only believed in the numbers and percentages. Today, I understand much more about the emotional side of money. If you make no progress over the course of a year, there’s about a 100% chance of giving up. If, however, you pay off a $2,000 loan and get rid of that payment completely, you’ll be charged up and ready to tackle another!
I’d still suggest that people pay off their $10,000 zero interest loan before their $20,000 18% interest loan because there’s a greater percent chance of them getting rid of the smaller debt and continuing their debt payoff journey! Pay a couple thousand extra dollars in interest but paying off the debt is better than trying to save the interest and failing at the debt payoff entirely, don’t you think??”
What? I aimed to find the most ridiculous spread from high rate to low, trying to show how there’s some point where it’s silly to pay off your low-to-no interest debt first. And, with a daughter about to enter college, I figured that an example of 8 low rate separate loans was actually possible. Here’s what this would look like. Do you see what makes this so ridiculous? You graduated college, and the loans happen to be individual loans. The lender could just as easily have made this into one loan with a monthly $664 due. In which case, the snowballers would have no issue paying the “low balance” $20,000 card first. But because these loans are each $10,000, they rise to be the priority, pay them off, get rid of 1, 2, 3, etc as fast as you can, before sending an extra dime to the $20,000 high rate loan.
Let’s look at what happens when we prioritize that awful 18% debt. I happen to choose a total $1,200 available to pay debt, just $236 more than the minimums required. If we pay the low balances first, the interest jumps by over $20,000. A $10K loan is too small to kill in less than a year with only the $236 extra, so the snowball takes 32 months to eliminate one debt, while my plan gets rid of the credit card 18% debt in 56 months. Would you really be happier paying interest-only for 89 months on that 18% debt but feeling great that you have fewer loans, fewer checks to write?
The truth is that most people are not in such an extreme situation. And the real cost may be far less that this contrived example. As I offered on Derek’s site, knowledge is power. Why would you not wish to know the cost of one method vs another? And if you knew the cost, how high (or low) would it need to be to sway your approach to paying off your debt? What could you do with the $20,000 you’d have saved over these 10 years? How much snowball Kool-Aid does one have to drink to state they will stick to a method no matter the cost?
By the way, I do believe in more than numbers and percentages. I also believe one shouldn’t fall for bad advice offered by a celebrity, Dave Ramsey, who takes a “my way or the highway” approach to his advice. Know your options, and decide for yourself.
On a final note, as I was writing this, John, another blogger who writes at Military Fire, also visited Derek’s article, and agreed with me, stating,
“If the snowball method costs you “a couple thousand” annually, and you make less than $50K a year, you would have to work 13 months a year to recoup that unnecessary interest. The snowball requires nuance. Lets help people work smarter, not harder.”
Derek, on the other hand, wasn’t budging,
“I’m a nerd just like you and understand the percentages perfectly. After helping hundreds of people though, there’s no denying that those who pay off a debt early are far more likely to stick with their debt snowball. To help the most people possible, I’m sticking with this method for life.”
Check out John’s excellent article Debt Snowball: Not a Chance in Hell, because John doesn’t like throwing away money on interest any more than I do. If you comment at either site, let them know that Joe sent you.