Snowball Debt Reduction - Myth or Magic?

[cptacek]

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]

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.

[debtconsole]

In this case, it makes sense because the two balances are close. In Dave Ramsey's book, he talks about doing it the other way, but he is assuming that you have several debts and maybe one is only about $300. In that case you can pay it off quickly then take the entire amount to apply to the bigger debt.

[nitemarecooper]

Originally Posted by SnoopyCool

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