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Is the Debt Snowball Method the Best Way to Pay Off Debt?

debt snowball methodSnowballs are fun, except when it comes to debt levels snowballing out of control. Credit card after credit card, loan after loan, missed payment after missed payment and the debt skyrockets upward, seemingly with no end in sight.

Until one day, a light bulb flashes and you wake up to realize that debt is creating a stranglehold on your life. It’s decreasing your chances of retiring wealthy and living a stress free financial life. So you decide to focus with intensity and develop a plan that will get you out of debt.

But which debt do you pay off first? You’ve accumulated so many.

Two Methods: Opposite Sides of the Track

There are two basic methods to paying off debt, the Interest Rate Method and the Debt Snowball Method.

The Interest Rate Method (IRM)

The interest rate method says a person wishing to pay off debt should focus on the highest interest rate debt first. After that is paid, the individual should progress to the next highest interest rate debt and so on and so forth, down the line, until the debt with the smallest interest rate is paid off last. It’s a mathematical play on debt, as the debtor tries to eliminate those obligations that are causing the most interest to accrue.

So, if a person had the following debts in this hypothetical example…

Debt 1: Car loan – $14,000 at 6% interest

Debt 2: School loan – $7,500 at 3% interest

Debt 3: Credit Card #1 – $600 at 10% interest

Debt 4: Credit Card #2 – $4,250 at 15% interest

Debt 5: Personal Loan – $1,000 at 1% interest

…they would pay off the debts, one at a time, in this order:

Payment #1 – Debt 4: Credit Card #2 – $4,250 at 15% interest

Payment #2 – Debt 3: Credit Card #1 – $600 at 10% interest

Payment #3 – Debt 1: Car loan – $14,000 at 6% interest

Payment #4 – Debt 2: School loan – $7,500 at 3% interest

Payment #5 – Debt 5: Personal Loan – $1,000 at 1% interest

The Debt Snowball Method (DSM)

Using the debt snowball method, a person pays off debts from the smallest amount to the largest amount, regardless of the interest rate. While perhaps paying some more interest along the way, they gain the psychological boost of ridding themselves of the small debts quickly. This creates momentum and enthusiasm for paying off the bigger debts yet to come in the cycle.

So taking into account the debts listed above, the person using the debt snowball method would direct their main focus on one obligation at a time (while only paying the monthly minimum on the others), in the following order:

Payment #1 – Debt 3: Credit Card #1 – $600 at 10% interest

Payment #2 – Debt 5: Personal Loan – $1,000 at 1% interest

Payment #3 – Debt 4: Credit Card #2 – $4,250 at 15% interest

Payment #4 – Debt 2: School loan – $7,500 at 3% interest

Payment #5 – Debt 1: Car loan – $14,000 at 6% interest

Battle Royal: Math vs. Psychology

Which method is best for you? Many of my personal finance colleagues are having success with either method. In the end, it probably comes down to what you value more – math or psychology.

I personally value psychology more and the emotional boost I get from achieving a goal. In the debt snowball method, I can probably have my first two debts paid off quickly if I really clamp down on my budget and sell a few things around the house to raise some cash. For many who doubt and are fearful about the debt payoff journey, having two debts gone quickly will jolt their confidence higher and help them believe they can have success.

It would be awfully tough to see $4,250 staring at me in the interest rate method payoff plan as the first debt I had to conquer. I’m not saying I couldn’t do it, just that it creates more of a challenge right off the bat. For an emotionally scarred individual, beaten down with years of frustration over debt, that’s going to be a difficult initial mountain to climb.

The Good News

The good news is that both can work…but only if you get started. Set some specific and realistic goals about when you want to be debt free. If debt has you prisoner, I can’t think of a better goal for 2014 than to set a plan to break free from its chains.

Questions: Which method do you prefer: the interest rate method or the debt snowball method?  How successful has either method been for you? Are there any more advantages/disadvantages to these methods? Is there another method you are using?

Image courtesy of Wikimedia Commons

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  1. Im doing the irm, n paying minimums on cc’s. The psychological def works for me so using mint to see the balances decreasing n having the Equifax premium plan also helps. I’ve watched my score increase 30 some points in the last month. Once I reach my score goal I’ll cancel the membership n bank that 20$/mo.

    • Great job Ennis! I think the psychological benefits to using this method are definitely worth it. When you can track it and see the progress it really can get you fired up about paying off debt.

  2. Monica @MonicaOnMoney says

    Brian, I used the debt snowball method and it helped me get debt free (except my condo)!

  3. I like tackling the little ones first, then focusing on the highest interest rate debt.

    That said, my highest debt rate is 3.375% for my rental property and I just can’t seem to get myself to pay it down. Maybe when some CDs come due, I donno.

  4. I used to be a big believer in the math method, but I’m starting to lean towards the snowball method. I think a lot of people who get into debt need the emotional and psychological benefit of a victory of paying off a loan to continue on their journey of getting out of debt. Without the small victory, it is very possible they just throw their hands up and give up. Math makes the logical sense…but emotions and psychology is very significant in paying off debt as well so I don’t discount the snowball method anymore.

    • Many with debt have come to that position through big time money management mistakes. It’s human nature to beat ourselves up over mistakes. It’s also really tough to muster the courage to face our mistakes and try to improve ourselves. I think that’s the big value in the snowball method…it’s a quick boost of confidence to people who haven’t had any for a long time.

  5. I definitely prefer the math method, but I agree with your premise that both have their own advantages. It probably comes down to peoples’ personality-type. The main thing is to TAKE ACTION!

  6. I prefer the math version though I can certainly understand why people like the psychological version better. I personally only pay the minimum on my debt while I make a comfortable emergency fund. I will continue to increase my side hustle income until it offsets both my student loan and mortgage payment.

    • Having an emergency fund is a big part of the debt payoff process. When that’s in place, you can draw on those funds when emergencies come instead of going into debt on a credit card to pay for them. Just curious…how big an emergency fund are you going to build before you begin to aggressively tackle the debt? 3-6 months?

  7. MoneySmartGuides says

    I prefer the math version more. But I see why so many people favor the other side. Seeing progress on your goal gives a huge boost of motivation to keep pushing forward.

    • For most, the debt journey is so long. You have to find motivation somewhere along the way so you don’t burn out. Maybe that’s a special celebration when you reach a goal. I know that’s what we do and it’s always lots of fun.

  8. Similarly to Alicia, I’m paying off my student loan with the higher interest rate first, but it also happens to be the smaller balance. I think it really depends on the person and the situation. My student loans are the only debt I have, so I can’t really say what I would do if I had multiple balances. I understand the thoughts behind both, though.

  9. My opinion is to do the math,there are on line calculators that show the difference in outcome for each method. If the psych boost is working for you, go for it. Snowball away. I object to when The David makes a ‘my way or highway’ claim. The math is the math, but the good feelings can’t be quantified, the user needs to decide.

    When I was young and stupid, I noted that the cards with the great rate (6-8%) all had low lines, $1000 typical. But my 18% card had a $10000 line. $1000 to the high rate card saved $180 the next year vs $80 on the low rate cards.

    Last – If the employer is matching 401(k) deposits dollar for dollar, don’t miss out. The debt payoff may be delayed a bit, but the result can be doubling thousands of dollars each year. Want a psych boost? Just keep a tally, The 401(k) balance minus the card debt. The matched deposits will grow fast, and you’ll pass the zero mark in no time. At the point when you’ll have paid off the debt, you’ll see the 401(k) balance at a nice level and a bit of debt left. The remaining payoff will feel great as your retirement account was jump started.

    • I don’t really object to Dave Ramsey being passionate about his position. He’s working from years of experience with people in real financial pain and has seen that method work over and over again. Clearly, he thinks it’s the best while others have a different perspective on it. Like you said, the user needs to decide.

  10. I’m using the interest rate method… but I also lucked into that being the snowball method 🙂 It’s so personal, and definitely dependent on on the individuals mentality.

    • Seems like some places in the blog world people take it too personally…almost to the point where you can’t discuss it. The important point to remember, no matter what plan you use, is that you have committed to paying off debt. That’s the big step most people don’t even take.

  11. Six Figures Under says

    My husband and I are paying off student loans that started at around $130K (now at $100K). We started with the higher interest ones and are working our way down to the lower interest ones. We tend to view our loans as one big loan, though technically there are about 8 of them (two each year of school).

    With numbers that big, the math makes a big difference (I suppose psychology could too, though). We are very motivated (and are generally positive and upbeat people) and aren’t worried about burning out. The great thing about paying debt off in a healthy marriage is that we can help motivate and encourage one another. It is rare that we would both be in a funk together.

    Another thing to factor in for our situation is that we don’t have credit card debt. In the Dave Ramsey’s version of the snowball method, once you get rid of your smallest debt you get rid of that credit card. If you have loads of credit cards it would be good to pay off the smaller ones and then cut them up to remove the temptation of racking up more debt.

    • “…paying debt off in a healthy marriage is that we can help motivate and encourage one another.” Boy isn’t that the truth. Makes the debt burden easier to bear with a committed spouse at your side. Congrats on knocking out 30K of your student loan debt thus far!

  12. Demaish @ Borrowed Cents says

    I am using the debt snow ball method adopted from Dave Ramsey. However,there is one credit card with 28% apr I used the Interest method (adopted from Suze Orman) because I was just tired of seeing my money get lost. So I diverted from the snow ball a little bit. However, I like the snow ball because you pay off debts every couple of weeks and then you have more money to put towards your next debt.

  13. Fit is the New Poor says

    We are doing the snowball method now to pay off our credit cards. But once they are gone, we are going by interest rate for our student and personal loans. I’m hoping that the emotional boost of being credit card debt free will carry us through as we work on our loans.

    • So you are taking a blended approach then. Since you will be experiencing both angles, I think it would be interesting for you to track how that goes…see which one works or you end up liking the best. May be something interesting to write about.

  14. Things like this are so personal. When I had a couple thousand dollars of credit card debt when I was ~19, I used the debt snowball method and it worked for me. I enjoyed how quickly I was able to pay off my balance and didn’t miss the smaller amounts of money.

  15. I’m a fan of the snowball method. Once you experience that first victory of paying off a debt entirely it’s very addictive!

  16. Holly Johnson says

    When we were in debt years ago, we successfully used the snowball method. I think we did smaller balances first, as opposed to balances with a higher interest rate.


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