Whatever happened to get you in to debt (whether it’s a loss of a job, an illness or previous bad credit by taking out things like payday or guarantor loans) there are loads of approaches to getting out of debt. The term Debt Snowball has been around for a while now. Originally coined by the American money Guru Dave Ramsey, it has gained popularity in the debt free community for it’s simplicity and apparent effectiveness. What is it and is it the right approach for you though?
In short, the Debt Snowball approach involves making a list of all of your debts and then making the minimum payments on all of your debts, but focusing all your extra cash and money available for overpayments on the debt with the smallest balance first. One that debt has been cleared, you then focus any extra money and resources on the next smallest debt. The idea is that with every debt cleared off, you are seeing progress and therefore gaining momentum on your debt clearing. As you see each debt cleared off, even if they are the smallest ones, this is encouraging you to keep going and stick it out.
Very simply, the Debt Snowball method is very much about your behaviour, and that is prioritised over the long term cost of debt repayments. If you are someone who has struggled with sticking to your goals and staying focused, this may very well be a great approach for you.
I did not use the Debt Snowball approach to clear my debts, but I know it has worked for a lot of people, and is very popular, particularly in the United States. As someone with a very mathematical and numerical way of thinking, I am not sold on it entirely. The reason for this is that the smallest debt may not have the smallest interest rate, and therefore I am not 100% convinced this is the debt you should be focusing on repaying.
I recently heard about the Debt Avalanche approach and for my way of thinking, I believe this may be a better approach, mathematically at least, but it doesn’t give you the increased momentum that the Snowball approach has.
As before, you make a list of all your debts, but instead of listing them in order of the balance owed, you list them in the order of the interest rates, starting with the highest rate first. You also then make the minimum payments to all your debts, but this time, any spare or extra cash is used to prioritise paying off the debt with the highest rate first. This is because the sooner your pay off the debt with the highest rate, the sooner you reduce your average interest rate across all of your debts. This will therefore mean that you will end up paying back less in total when clearing all your debts. Mathematically this one makes more sense to me, but, and it is a big but, it requires a lot more discipline.
I had not heard of either of these approaches when I was in debt, and I therefore can’t categorically say which one I would use if I was back in that position now. What I would say though is that Dave Ramsey is a very respected and successful money author and teacher, with a very inspiring way of how he came to talk about debt and money. I can see that his approach makes sense and therefore would have no qualms recommending it for someone, even though I have not tried it myself (which is something I try to never do – I like to have tried things before I recommend them). I understand the principles and the mathematics behind the Debt Avalanche approach, but to be honest, even though my mathematical brain is yelling at me that this is a better approach, my heart is telling me otherwise. I, like Dave, have been through debt. I know how utterly soul destroying and heart breaking it can be, and so, even though in the long term the cost will be higher, I can see that to get out of that black hole, and to encourage you to keep on going, the Debt Snowball approach does make sense! Interested in knowing more about Dave and his teaching? He has many books and resources available online:
At the end of the day, it is a very personal decision so I think only you can make that call but I hope this information has helped, and if you are having money worries – don’t forget that there are plenty of debt and money charities who can give free advice and guidance to help you get back on your feet!