Snowball Debt Reduction - Myth or Magic?

[lukkyb22]

Re: Snowball Debt Reduction - Myth or Magic?

Largest % first, unless you have teeny tiny ones and feel you aren't disciplined enough to stay the course. If you are paying down all big ones, and you are watching it chip away on a regular basis, you will be motivated. By the way, if anyone gets a tax return, they need to alter their W4 and increase their dependents. Then they can take that extra $$ in their paycheck and use it to pay down debt instead of giving it to Uncle Sam interest free for a year. But congratulations to everyone beginning the climb out of the hole!

[MarshallMiddle]

Re: Snowball Debt Reduction - Myth or Magic?

Although it may be tempting to pay off the smaller debts first for psychological victory, it will definately cost you in the long run. Pay off the highest interest rate first, then work you way down. Another option would be to consolidate your debt, if you could a loan with a decent interest rate.

[myself]

Re: Snowball Debt Reduction - Myth or Magic?

Have any of you tried the snowball debt reduction method?

We did at one point in our life. We had consumer debt that we paid mostly minimum payments on, to save for 20% downpayment on our house.
After we got the house, we worked the debt snowball to get all of it paid off. However we used both methods.

We used the payoff lowest principle first method until a couple of the bills were gone, and then switched to the higher interest rate second for the remainder.

Now, the only reason we borrow on the CCs is to use the balance transfer into checking at a low rate, and transfer that amount into savings at a higher rate. I think we made $1,050 last year using this technique (which included paying any minimal interest on the cards, balance transfer fees, etc.

[Squantum]

Re: Snowball Debt Reduction - Myth or Magic?

I feel like the 'debt snowball method' may be best suited for consumer debt (credit cards and cars primarily).

What about this: say that somebody has a 6.25% mortgage for $300,000, a new one with basically 30 years to go, and a 3.125% student loan of $10,000 with 15 years left. Now, we are not talking about credit cards; we are talking about fixed-term debt. One debt interest rate is 2x what the other is, but one debt is also 30 times higher. With aggressive payments, that $10,000 student loan could be paid off a lot quicker than the actual term. But the higher interest rate debt -- the mortgage -- has a principal amount that is so much higher that it would take many more years to pay off than the student loan, even with putting extra money toward that mortgage...

[Aleta]

Re: Snowball Debt Reduction - Myth or Magic?

We snowballed ours and I felt like it was more doable going from the smallest to the largest. My reasoning behind it was because when you have a smaller debt to get rid of; you can think of faster and easier ways to pay it off. Let's say that you have a debt balance of $200. and you are paying a minumum of $20. on it; all kinds of ideas start popping up to get rid of it. It's like eating an elephant one bite at a time. You might start thinking of how you can cut down your grocery bill to start throwing money at that debt. You might consider going out to dinner 1 less time, letting another week or two go before cutting your hair, opting out of that manicure that you can do yourself, sell aluminum accululating in your house, have a garage sale, and the list goes on. When you owe a large sum of money, it's harder to see the effect of what you are doing. While you were paying off that small debt, you were also paying on the rest and reducing them so by the time the one is paid off, number 2 is smaller also and you can use the first payment plus the present one (#2) to pay it off. It's mostly psychological but it keeps you focused.

[cptacek]

Re: Snowball Debt Reduction - Myth or Magic?

I started doing the debt snowball when I first got a job and had a mortgage, 2 student loans, credit cards, a business loan and a truck payment. I paid off the credit cards and one of the student loans with any extra money I could find and just paid minimums on the rest. Then I started doing some amortization forcasts on all my debts and realized how powerful it was to pay extra principal on high interest loans. Now, I put all my extra money towards the highest interest loan.

I think that one of the overlooked purposes of the debt snowball is to simply get rid of a payment every month. If you are struggling to meet the minimum payments on 5 debts every month and one month happen to scrape together enough to pay the one with the lowest balance off, the next month you only have 4 debts to make the minimum payments on. So, if someone is struggling with cash flow every month, I would suggest to them to pay off lowest balances until they can comfortably make all minimum payments. Then, attack the highest interest rate.

[Aleta]

Re: Snowball Debt Reduction - Myth or Magic?

I didn't read Jeffrey's first article on this subject. I had only read the last 5 or 6 posts. When you have 2 debts that are that close monetarily and an interest rate on the larger one that is 3 times what the smaller one is; I'd say to pay the higher interest rate. But, there are many like the previous poster said above that may have too many to pay out in one month. I had one that was smaller that was a high monthly payment and it just didn't make since to not pay it off. You eliminate one less bill to think about , your envelopes, stamps, time, and aggravation by getting even just one paid off. I know that we had one that was below $800 and one that was below $300. It was so much easier getting rid of those 2 so we could concentrate on the larger one. By the time you get to them, you already see what paying extra can do to eliminate that debt. I just think that every situation is different and one size doesn't fit all. It's good to get a 3rd party to give you some advice on your particular situation.

[nitemarecooper]

Dave Ramsey's Debt Snowball

Dave talks about the emotional high of paying off a debt and moving on to the next one (on his website) as being the reason why you should pay smaller balances first. I believe he even refers to a study on this. I'm not sure I agree (I like paying on the highest balances more first), but I bet that works for a lot of people!

I agree with you. I regularly catch Ramsey's tv show on XM radio as I am driving (long haul truck driver). Dave admits that paying off smallest debt first is not right mathematically (he says this in his audio book "Total Money Makeover"). However, he admits that if we were great at math and finance, then we would not be in debt. The idea is just as you said, when you pay off a small debt or two then you will be psyched up to continue. However, with me, my 2 largest debts are my 2 highest interest rate (about 9% each) so if I continue at the plan of highest interest rate first, then I will not reduce my monthly expenses until about 2-3 years from now when I pay off those car loans and only then get to my smaller credit card debt. In that case chances are I will lose interest and not keep up the getting out of debt.

Nitemarecooper