Debt Snowball Method Works – But It Will Cost You $$$$

Money and credit card costs with debt snowballThere is an old saying that “numbers don’t lie!”

And an even older saying that “you can make numbers tell any story you want.”

Those divergent conclusions about the truth or fiction numbers tell apply to the debt snowball method for solving debt problems.

Does the Debt Snowball Work?

If you just use raw numbers, the math says that the debt snowball method takes longer and costs more than other debt relief options like a debt consolidation loan or debt management program.

However, if you put the right numbers in the right categories for the right amount of time – and let momentum do its thing – you can make the numbers tell the story that the debt snowball method works just as well as a loan or debt management program.

So which side of the story should you believe?

Answer: both!

The truth about the debt snowball method is that it’s a motivational program that can work at eliminating debt, but it’s going to cost you more money and time – sometimes a lot more money and a lot more time – than other debt relief options.

What Is the Debt Snowball Method?

The debt snowball method is a five-step approach to reducing debt made popular by nationally-syndicated radio talk show host Dave Ramsey, who claims momentum – not math – is the key to eliminating debt.

Ramsey says if you list all credit card debts in order of amount owed and start by paying off your smallest debt, then move up the ladder and eliminate them one-at-a-time, you will have more success at retiring all debts. He believes the wins on small debt build confidence and lead to wins against larger debt amounts.

Ramsey has plenty of support and not just from the 13 million weekly listeners to his radio show. He also has backing from Blake McShane and David Gal, professors at Northwestern University’s prestigious Kellogg Business School, who studied the issue and published their findings in the Journal of Marketing Research.

“We found empirical support that psychological factors can be helpful (in paying off debt),” McShane said. “Paying off a small balance – a quick win – can make you feel good about yourself.”

How the Debt Snowball Costs Money

Still, numbers don’t lie. If you look at your money troubles from strictly a math standpoint, there are a few formulas for wiping out debt and all of them work faster and cost less money than the debt snowball method.

Not even Dave Ramsey argues that.

The suggested ways include:
  • Start by paying off the debt with the highest interest rate until it’s eliminated, then move on to the one with the next highest interest rate, pay it off and repeat until all debts are eliminated.
  • Find a solution that offers a lower interest rate and monthly payments that you can afford.

The thinking behind the first solution is that if you let the debt with the highest interest rate sit for a long time, it will cost you a bundle in interest payments so attack it immediately.

The second solution is the recipe for a debt consolidation loan or debt management program. Both are effective, but only if they reduce your monthly payment by lowering the interest rate you pay on your debt.

How the Debt Snowball Works

Here is a summary of how Ramsey’s five-step debt snowball method should work.

Step 1: List all debts (except your home) in one column from smallest up to the largest.

Step 2: Start a second column that lists the minimum monthly payment due on each debt.

Step 3: Pay the minimum due on each debt every month and add $100 a month (more, if you have it) to paying off the smallest debt.

Step 4: When you have paid off the smallest debt, add that amount to whatever the minimum payment you were paying on the second smallest debt and continue paying the minimum on everything else.

Step 5: When you finish paying off the second debt, repeat that formula – amount dedicated to paying off smallest debt + minimum payment due = total monthly payment – until all debts have been cleared.

To properly follow the debt snowball, you should also commit to the Dave Ramsey budget.

Snowball Example for $22,500 of Debt

The example of the debt snowball method Ramsey offers on his website is for paying off $22,500 spread over four debts. Our sample will keep the same amount and spread it over four credit cards with suggested interest rates applied to each card.

So, credit card #1 has $500 in debt at 12% interest; credit card #2 has $1,000 at 15%; credit card #3 has $6,000 at 24%; and credit card #4 has $15,000 at 16%.

Here is what the debt snowball method looks like when matched up against two other debt-relief options, debt consolidation loans and debt management program.

Using Ramsey’s suggested starting points for each card, the total payment every month would come to $565. Card # 1 would be paid off in five months; card #2 in 12 months; card #3 in 42 months and card #4 in 65 months.

The total amount paid would be $36,191.13 spread over 65 months.

Snowball Alternatives

Debt Consolidation Loan vs. Debt Snowball

A debt consolidation loan typically has a 5-year payoff period at a fixed interest rate. If the borrower got the loan at 18% APR, the monthly payments would be $571.35, or about $6 a month more than the snowball method.

However, the debt would be paid off in five fewer months at a total cost of $34,281.13.

That means a savings of $1,910.

Debt Management vs. Debt Snowball

A debt management program works when credit counselors work with card companies to reduce the interest rate on the debt owed and arrange a monthly payment schedule the consumer can afford. There also is a monthly client fee involved in DMPs.

The projected interest rate reductions for this example were 8% for card #1; 12% for card #2; 10% for card #3 and 8% for card #4. As one card gets paid off, that money is allocated to the card with the highest APR.

The monthly payment, including fee, would be $514 a month and the debt would be eliminated in 60 months. The total amount paid would be $30,757.75.

That is $5,433.38 less than what would be paid in the debt snowball method and $3,523.38 less than what would be paid through a debt consolidation loan.

Bottom Line? Commit to Paying off Debt

Given the number of followers Ramsey has – some might call them devotees – it’s difficult to argue that his debt snowball method is worth considering if you are financially overwhelmed.

Boston University professor Remi Trudel did a study with 6,000 credit card holders and fully supports the snowball method and its effectiveness.

“Our research shows that consumers will get out of debt quicker paying down accounts one at a time starting with the smallest,” Trudel said. “Allocating the most money to the smallest account was particularly effective. Doing so increased consumer’s motivation to repay debt in the next period and increased progress toward the goal of becoming debt free.”

So, if you are the sort of person who needs encouragement, the debt snowball method could be the right solution.

However, be aware that waiting to pay off high-interest debt likely will cost you thousands of dollars and increase the amount of time you spend in debt.

In the end, the only inarguable point about paying off debt is that you must be committed to the process. It’s likely you didn’t fall into debt overnight and it’s even more likely you won’t get out of debt overnight.

No matter how you work the numbers, it takes time and commitment to get there.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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