Debt Snowball vs. Debt Wrecking Ball

Dave Ramsey has made the term “Debt Snowball” famous, but if you’re buried under an avalanche of debt, is his remedy more like a debt snow job?

Ramsey disciples would say no. So would Ramsey, the self-made financial guru who’s turned getting out of debt into a $55 million fortune.

His radio show is on more than 550 stations. He’s sold more than 10 million books. It’s fitting that his Financial Peace University program is taught in churches across America because Ramsey’s followers see him as Moses, freeing them from the financial desert.

A prime commandment on his stone tablet is the Debt Snowball. The instructions are pretty simple: List your debts and pay them off from smallest to largest, regardless of their interest rates. You build momentum and that snowball effect will propel you to wipe out the other debts.

Before you know it, you’ll be on his radio show screaming “I’m debt freeeeee!”

Thousands of followers have used this technique to pay all their bills, so you can’t say the Debt Snowball doesn’t work. But that doesn’t mean it’s the best way to pay off debt.

No less than Albert Einstein would recommend first paying off debts with the highest interest rates. This method is sometimes called Debt Stacking, though we prefer the Debt Wrecking Ball since it will hammer your debt more efficiently.

Don’t just take Einstein’s word for it. Sir Isaac Newton would also have been on board. It’s true that neither man gave debt advice while discovering things like gravity and the Theory of Relativity, but Newton and Einstein were mathematician and basic math says ignoring interest charges will cost you money.

How The Debt Snowball Works: An Example

For example, let’s take a guy with three major debts. We’ll call him D. Trump.

D. is carrying a $10,000 balance on a Visa card that has a 19.9 interest rate, and a $3,000 balance on a Discover card with a 13.9 interest rate. He also just bought a $2,700 hot tub at Sauna World, but the purchase has a 0.0 interest rate for the first 12 months.

D. is making the minimum monthly payments of $200 on the Visa and $60 on the Discover. But he starts moonlighting as a 7-Eleven clerk and picks up an extra $900 a month to put toward his debts.

Instead of attacking the largest one, D. pays off the hot tub in three months. He feels great as he puts a big X across one-third of his debt list. The problem is in the meantime he’s accumulated $622 more in interest on the Visa and Discover cards.

That kind of financial logic would make Einstein pull out his hair. As much as that might hurt, contradicting Ramsey can be painful on a person’s ears. He’s called his critics “morons” and “financial idiots,” and is dismissive of all contradictory financial advice.

Financial Advisors Recommend the Debt Wrecking Ball Over the Debt Snowball

But when it comes to the Church of Dave, there are plenty of blasphemers. A NerdWallet survey of 100 financial advisors found that 80% would recommend a Debt Wrecking Ball approach over the Debt Snowball.

Most advisors agreed, however, that psychology plays an important role in debt reduction. And psychology is really what the Debt Snowball is all about.

“Personal finance is about 80 percent behavior,” Ramsey says.  “It is only about 20 percent head knowledge.”

The head knows paying off larger debts first makes sense. However, a lot of hearts need the stimulation of shooting down the easiest targets first.

The Psychology of Paying Off Debt

Call it “temporal dynamics of motivation after sub-goal completion.” That’s an actual term from a study of 5,943 consumers by two assistant marketing professors at Northwestern’s Kellogg School of Management.

It found that people who paid off small balances first were 14% more likely to become debt free than those who randomly paid off debts. In other words, psychology trumps mathematics. Ramsey economics win!

The irony is that the foundation of Ramsey’s advice is discipline. Success is based on sacrifice, determination and stuffing your credit cards into a paper shredder.

If a person has the discipline to do that, shouldn’t he or she have the wherewithal to stick to a demonstrably superior approach like the Debt Wrecking Ball?

Ramsey says that getting out of debt takes a sense of responsibility and maturity. If you have those traits, why not apply them in the most effective way?

A lot of financial advisers say the Debt Snowball is OK if your debts are relatively small. The impact of interest rates will not be as great, and the motivation of snowballing is worth the tradeoff.

But if you’re truly committed to getting out of debt, which is better – the Snowball or the Wrecking Ball?

You don’t have to be an Einstein to figure that one out.