Your Understanding of "Snowballing"?

Question

Looking for folks' understanding of "snowballing".

From what I've found while Googling generally, it seems to be a hybrid of the "Debt Snowball" promoted by Dave Ramsey and "debt stacking" from Primerica in that it suggests to order debts by highest interest rate first, although the one with the highest rate may not be the highest outstanding balance. Thus, other balances may pay off before the one with the highest interest rate.

Your thoughts?

Andrew Johnson · Answer

@David Dachtera It's psychological motivation and reinforces your scrimping, eating instant ramen noodles, driving for Uber at night, etc.  A lot of people ended up under a pile of debt because didn't have financial discipline.  So even though the subprime car loan is a higher interest rate, paying that down will seem like an "endless" process compared to a smaller credit card debt.  If you pay off that credit card and move debt-by-debt you can get some positive reinforcement so you stay the course.

Larry Turowski · Answer

Snowballing means paying only the minimum on all debts except one, this is generally the smallest debt.  The idea is to pay this one off fast, giving you a psychological boost that keeps you motivated.

It is not the most financially efficient way to pay off debts, but people who rack up multiple lines of debts need a psychological boost more than efficiency.

Once the smallest is paid off, you add that payment amount to the minimum of the next smallest until that one is paid off.  And so on.  The snowball comes from the ever larger sums you are paying toward a single line of debt.

Jeffery Waicak · Answer

I'll add another point for the debt snowball. Cashflow. If I have an installment loan, until the last payment is made, the payment doesn't change.  So if I pay off 2 credit cards and a small signature loan with $3000 total, then lose my job. I'm in a better position cashflow wise than  I paid 7 extra  on a high interest installment  loan

David Dachtera · Answer

Great! Thanx to everyone who has responded so far.

I ask because I've been preparing a presentation on Debt Strategies focusing on three primary strategies:

• Debt Acceleration
• Debt "Snowball"
• Debt Reduction

This is geared toward W2 people, mostly. I took an economic approach rather than psych.

Debt Acceleration which is taught as part of basic financial education in some countries around the world - most notably, Australia and New Zealand - is for folks who have a surplus at the end of the month and who can use either their checking account or some other repository to allow that surplus to build up and, once a year or so, apply that accumulated surplus to, for example, the mortgage on their primary residence resulting in an earlier payoff and less interest over the life of the loan.

Debt "Snowball" is for folks who have very little surplus at the end of the month. Using their existing income and a point-in-time snapshot of the minimum payments, they pay their debts off sooner using the snowball technique.

Debt Reduction is a last resort for folks who have "too much month left at the end of the money", as Tony Robbins would say. They can eliminate their existing debts in 3 to 5 years using a combination of negotiated debt reduction and consolidation of the remaining balances. They take a hit to their credit, but without the 10-year impact of an actual Chapter 13 Banktruptcy filing.

Not everyone in debt trouble today is there through their fault. Some lost it all in the crash and are floundering in their attempts to recover. Others are aging boomers finding themselves discriminated out of their jobs (age discrimination disguised as economic discrimination which is unethical but not illegal) or who lost their retirement savings in the crash and are finding their social security income falls well short of their monthly bills.

Ian Tudor · Answer

@David Dachtera - this is based more in psychology than anything. Change psychology suggests that people need to celebrate small wins constantly. Tony Robbins speaks about this often as well to reward yourself immediately after completing a desired task. It is to get people started and sticking with the program to paying off debt. Think about it. If you $100 left over one month and pay it to $25,000 in student loans, you might feel like you aren't going anywhere. However, if you paid off your Kohl's credit card, you knocked one down. That's success!

Your Understanding of "Snowballing"?

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