As you might have heard, there are numerous advocates these days of the “debt snowball” method. This method entails paying of your various debts in order from smallest from largest. Here’s how it works: when you sit down to pay your bills, you lay out all your obligations from smallest to largest. Then, you pay the minimum balances on the larger debts while contributing as much as you can to the smallest balances. Once the smallest ones have been repaid in full you move on to the larger ones, in the process “snowballing” your debt by gradually tackling more substantial amounts as you go.
Proponents of this approach argue that the method motivates people to start reducing their debt (by giving them an achievable early success) and it helps them keep going (by empowering the debtor to methodically move up the ladder). When faced with the overwhelming feeling posed by a debt burden, the snowball method, supporters say, gives people a blueprint for tackling their debt and the regular assurances to keep them on the right path.
There is certainly some validity to this argument. It’s true that it is usually easier to start small rather than facing a large project head-on. It’s also true that the snowball method offers a sense of satisfaction during the process that most plans do not. But these benefits cannot outweigh the far more overwhelming negatives of the approach. Here are a few of the main ones:
–Interest matters. With the snowball method, a person might first pay off a debt that has an interest rate far lower than a different debt that carries a larger balance. This larger debt coupled with a higher interest rate will likely grow into a far more substantial financial burden than the smaller obligation with the lower rate. Paying off the latter first, then, may only push one’s total debt higher in the long run. Indeed, studies have shown that this is usually what happens.
–The psychology could backfire. Despite the issue with interest rates, snowball method advocates believe that the approach is still worthwhile for the psychological benefits it conveys. But for some people these benefits can easily backfire; after paying off and celebrating the elimination of his lowest debt, a person might “take a break” or get complacent before moving on to the next step. By splitting up the debt into mini objectives, the method consequently can seem more onerous from a psychological perspective over time.
–Puts emphasis on the wrong values. Debt isn’t about the different bills you have or the various ways it has been incurred. At the end of the day, rather, debt is debt. Obligations are obligations. Interest is interest. Rather than breaking our debt down into smaller pieces, we should instead realize it for what it is and built our budgets with this understanding in mind. Paying off one piece of debt could have little to no impact on our larger financial picture. As a result, although the snowball approach may make it easier to get it started, the emphasis on individual obligations can make it more difficult to see the big picture.
These are a few of the main problems with the debt snowball approach. Ultimately, the method provides no advantages once the debt-reduction process has begun. But how can we motivate ourselves to start cutting debt without a snowball approach? This is an important question to ask, and the answer certainly will vary from person to person. However, here are a few suggestions:
–Collect a “debt payment” pool. Take peripheral cash sources and put them towards a pool (these sources may include investment income, part-time work, or a rebate provided through the Green Dot tax refund direct deposit program). Then, take that fund and use it to bite a chunk out of your debt – a chunk large enough, hopefully, to motivate you to get started.
–Make long-term goals. Getting out of debt means making some sacrifices in the present for more financial security in the future. Why do you want to be debt-free in 20 years? So you can travel? Retire? Send your kids to school? Keeping these goals in mind can make it much easier to get started.
–Write out a plan. Don’t just have a plan floating around in your head; instead, write it down on paper and give in a specific timetable. Decide when you’re going to start, how much you’re going to contribute, and when you’re going to finish paying off your debt. Then, execute your plan.
There are many ways to motivate yourself to reduce your debt, these above listed tips comprising just a few. But the snowball method should not be one of these motivating forces that you consider. While perhaps appealing at first glance, you will only stand to hurt your prospects in the long run.