Debt Snowball: Not a Chance in Hell

Have you considered the Debt Snowball for your debt? Learn from my story and save yourself the trouble.

As I noted in the introductory post, before we got married, my wife and I sat down and seriously discussed our finances. I knew she had student loan debt. When she said she had a lot of debt, I assumed the worst would be twice the average borrower, for a total of around $60,000, on account of her Master’s Degree tuition. So we sat down, pulled together the statements from her various loan servicers, and started adding them up to get the latest figure.

The total, principal and accrued interest, was over $107,000!

She also told me that she had been making the more than the required minimum payments. Even so, we were left with six figures of non-dischargeable debt.

When I was researching debt repayment, I came across the eminent David Ramsey. While we found his Total Debt Chart recommendation vital, we rejected his “debt snowball” approach.

The Debt Snowball idea is to gird yourself mentally to pay off debt. Ramsey has noticed that debt is a difficult problem for many people to even think about, let alone tackle. His method takes the smallest debt first, even a lunch money loan from a co-worker, even if the loan does not carry interest, and pays it off completely. Then, moving on to the next smallest loan, and paying it off, using the money that was going to the smallest loan in addition to your minimum payment. Over time, this is a mentally satisfying exercise, as the number of loans you have shrinks rapidly.

I was not interested in the number of our loans, I was interested in the amount of our loans. Our smallest loan was at 3.25%, for only $2,000 initial principle.  The annual interest on this loan is about $65.

$65 sounds pretty familiar- it’s the monthly interest amount on the larger, 8% loan. By divorcing emotion from our loan repayment plan, and by deriving satisfaction by seeing the balance itself decrease, we saved big money. You will also note that I used the present tense in describing the loan interest on 3.25%. We still have this loan. Even though we could eliminate it, we only apply minimum payments, and it will be the last interest bearing loan we pay off.

We are all smart people. We are not afraid of our creditors (I hope no one is here to help repay their bookie!)  We are here to beat our DEBT.

Debt is money, it is math. It is not the numbers of bills you get in the mail, it’s the amounts on the bottom of those bills.

Enter my outsized emergency fund. While I no longer subscribe to a 3-6 month emergency fund, as my job in the armed forces is very secure in the near to mid-term, I was able to make a one time payment of about 10,000 towards the highest interest loan, completely paying it off. This loan was at over 8% interest. My high yield saving account made less than 1 percent. The return on investment was obvious. The monthly interest alone was nearly $65.

Reject the Debt Snowball, embrace Math!

Here is an example of a DS vs Math approach, using simple interest calculations. Rather than writing the complicated excel code, I used BankRate calculators, you can follow along here.

Bill and Melinda have a student loan for $1,000 at 4.5% interest. Minimum payment is $10. (There are special student loan calculations, but that’s another post.  They also have credit card debt of $5000 at 18 % APR. Minimum payment is $125. In addition to their minimums, Bill sells software on the side, and makes an extra $100 a month for an additional payment.

Total Debt: $6000

Debt Snowball method                                            Math Method (Extra $100 applied directly to principal with largest interest rate)
Debt Free: about 5 years                                         Credit Card Paid off in 2 Years 4 months,
Remaining Student Loan paid off in 7 months
Debt Free: 3 years 1 month
Savings 1,565

This is what Bankrate says
“This strategy could help you pay $1,565 less in interest. By applying an extra $100.00 from your consolidated student loan savings to pay off your non-student loan debt, you would be able to increase your monthly payment on this debt to $225.00. This could help you pay $1,565 less in interest. In addition, the time it will take you to pay off your non-student loan debt is reduced to 2 years and 4 months. This analysis assumes that each month you apply your extra payment amount to pay off your lowest balance first.”

Let’s sum it up: I’m now convinced that anyone who recommends the Debt Snowball method works for a credit card or loan company. Why else would they ask you to pay more interest, and stay in debt for years longer, just so you can feel good about yourself reducing the bills that come in the mail, but not your total debt?

It was hard, I had to learn to figure my way around excel and various loan calculators, but we have saved thousands by using the power of math.


Disclaimer: I am not a licensed financial counselor of any sort. The opinions contained here are my own. Investing has implicit risk, past gains are no guarantee of future returns. You may lose money, including the principal.


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7 thoughts on “Debt Snowball: Not a Chance in Hell

  1. Yes, the Dave Ramsey school of thought has a great underlining thought, which is to stay motivated, but in the real world of dollars and more sense, it is an expensive motivational tool. The correct philosophy is simple. High-interest debt gets paid first. Period.

  2. John, I saw your comment at Life and my Finances. and appreciate your support. You article here reflects my own view on the Debt Snowball. I’ve been writing for years about how the snowball is mathematically inferior, and the example I threw at Derek was designed to show the absurdity of his approach. He would suggest paying $80,000 in zero rate debt before 18% debt, which literally means letting that $20,000 accrue nearly $30,000 in interest. I wrote a lengthy article of my own and then saw your comment and blog.
    Derek has drunk the Kool-Aid, no set of numbers however absurd will cause him to budge. That’s unfortunate, because in my opinion, we need to teach our readers to look at the big picture, think for themselves, and see what course of action is appropriate for them.
    The same way I can show one extreme case, we can flip the numbers around, have 8 credit cards totaling only $20,000 or so, with rates between 12-18%. In such cases, when the snowball gets rid of the first card in 3 months, and another 2 the first year, I’ll concede, a total difference of just a few hundred dollars (total, not per year) might be worth ignoring if we believe in the “good feelings” of seeing those cards go to zero.
    In the end, your best quote was “Getting into debt is 80% emotional, 20% false logic. Getting out must be 100% logic.”

    Last, thank you for your service. My respect and gratitude to you and those who have served.

    1. Aunty totally agrees. However, I don’t always do the smart thing and go for the instant gratification of paying off small balances just to get them out of sight and mind.

      Credit card debt is SO easy to accrue and has the highest interest rate, so those need to go – before the due dates or there are penalties and fees on TOP of the principal and interest, so I pay them off even if I have to dip into savings. And that hurts. Spending less than I earn is the best practice and one of my top pieces of advice to my kids and whoever else’s ears I can reach. The best way to conquer is not to have the snowball at all.

      Mahalo to you and Joe Taxpayer, and a Happy New Year for us all!

      1. Happy New Year to you to Aunty! I’m glad to see you get the nuance, and are passing it on to your circle.

    2. Thanks Joe, and thanks for the kind mention on your page. After our initial comments on L&F, a ton more people jumped in to say how great snowball is. Hopefully we are making a dent…

      1. The ongoing nonsense (and I mean that literally, there is no sense is pursuing a more costly path) regarding the debt snowball’s superiority reminds me of the Groucho Marx quote, “Who are you going to believe, me or your own eyes?” When a celebrity, friend, blogger, whoever, is unwilling to consider ‘the other side,’ it’s time to move on. Derek went off on a tangent to one reader, suggesting that paying high rate first is as bad as investing instead of paying off your mortgage early. When I saw that red herring, I decided to move on, I’m sorry I even linked to his blog except to show the bad advice being given out.

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