Alternate Debt Snowball Theory: How Annoyed Are You?
There is a secret war going on in the personal finance blogosphere. No one talks about it openly, but it the battles break out everywhere. No blog post is safe! No blog post about “Debt Snowballing,” anyway.
If you don’t know the Debt Snowball Theory, it goes like this: in order to pay off all your debts, you rank them all up. You make the minimum payments on all of them each month, and you throw every extra cent you have at the debt ranked highest, until it’s paid off. Then, you “snowball” your payments for that debt into the next highest ranked debt, and continue on down the line.
The war is over how these debts should be ranked. There are two theories, each with valid points, which is why the war will never end.
Theory #1: High Interest - Rank your debts by interest rate, highest to lowest, and pay off the highest interest rate debts first.
Pro: Math-wise, this one wins. You’ll spend less money over time on interest this way.
Con: Your highest interest debts may also be your highest balances, meaning it might be a long time before you actually pay off that first debt. This can discourage some people, making them give up before they even pay off the first debt.
Theory #2: Low Balance (The Dave Ramsey Theory) - Rank your debts by balance, lowest to highest, and pay off the lowest balance debts first.
Pro: It won’t be long before your first debt is paid off, giving you an awesome sense of accomplishment, and encouraging you to continue on.
Con: Math wise, you lose, because you’ll probably pay more in interest this way.
Of course you want to know where I stand in this war. Look, people, I’m a math girl. I love numbers and data. So I’m in the “High Interest” army. But I certainly recognize the benefits of the “other side,” and I’m not going to knock anyone for going that way. In fact, if I had a really low balance debt, I’d probably pay it off first as well, to get it off my mind.
Theory #3: The Annoyance Ranking
I promised you an alternate theory, and here it is: Rank your debts in the order that they annoy you to have to pay, from “most annoying” to “least annoying,” and pay off the annoying ones first. The idea is that when the bills come, there are some bills that make you groan and moan more than others.
Let’s take The Boyfriend for example. He has two debts: his car loan, and his credit card debt. The Boyfriend loves his car to pieces, and doesn’t really mind making his loan payments every month. But his credit card? He hates it with a fiery passion. He curses it while shaking his fist up at the sky.
Basically, his credit card debt annoys the crap out of him. So, accord to my Annoyance Debt Snowball Plan, he should pay that one off first.
Why is this a good plan? Because, like the “Low Balance” theory, it plays to your human psychology. The top debts are making you more unhappy than the bottom debts, so pay them off first. Also, since you’re more likely to be annoyed by high interest debts than low interest debts, it takes the “High Interest” theory into account as well.
This theory is also good for when you have personal debts, especially family debts. These debts may be low balance and low interest, which would normally rank low in a debt snowball. But you probably feel a large amount of guilt over these debts, which would make them annoying. Putting them at the top of the ranking, and paying them first, will help improve your family relations, and perhaps prevent you from being shot in both kneecaps and lit on fire.
Pros:
Be rid of debts that make you unhappy.
Math usually works since high interest debts are more likely to be more annoying.
Con:
Math might not work, may end up paying more interest.
Feel free to add more “pros and cons” in the comments if you think of any!
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I posted a very similar question on a financial forum.
My wife and I are debating this topic and normally she gets whatever she wants. Her preferred theory is Theory #1 - Highest Interest Rate to Lowest. I’m not convinced that this theory is the best yet because, I’m a big Dave Ramsey fan. But, I’m slowly leaning towards it.
But, we have to make a decision soon, because by the end of this month we will have our baby emergency fund finished and then finally some extra income to apply towards a snowball.
Comment by JW Thornhill — April 7, 2007 @ 8:00 pm
I don’t understand why this is such a discussion or battle that rages.
Snowball payments should be made by a hypothetical cost after X months or years, on interest weighted balances (you can flip the name too)
ie. You have 3 loans
(1) $5000 @ 2.5%
(2) $1000 @ 10%
(3) $2500 @ 5%
Consider compounding for 12 months and assuming minimum payments (of say 3% of balance).
After 12 months, the interest accrued is $107.49, $88.90, and $108.68 respectively. Thus, this is an example where neither of the two methods would have chosen the best.
Essentially, you need to consider the compound nature of interest with balance. The easiest way to guesstimate is to multiple APR by $ owed. The highest value is then the first to pay off.
However, a more accurate method, is to consider compounding. Thus, it would be:
$Owed * (APR/12+1)^(10)
The 10 is arbitrary, and represents the value after 10 months compounded. You can use different month numbers, but it will give you a good estimate.
Comment by Finance Guy — April 7, 2007 @ 11:19 pm
Given that one of the biggest issues facing people trying to get out of debt is psychological, it makes sense to employ Ramsey’s theory on it, lowest balance first, to give you the sense of accomplishment as you watch accounts close faster.
While I agree that the method Finance Guy mentions and method #1 are both better for saving on the interest in the long run, if you don’t stay motivated to eliminate debt, neither of those two are going to save you anything anyways.
Just my .02.
Comment by Me — April 8, 2007 @ 2:48 am
If you leave the debt you’re most comfortable with until last, you’re a lot less likely to actually become debt free.
Comment by Trent — April 8, 2007 @ 11:31 am
Trent,
That’s a good point, but couldn’t the same thing be said of any of “Low Balance?” Once you pay off one debt, the next debt has a higher balance, which is more discouraging.
None of these are “one size fits all.” I think each person is capable of looking at their own situation and knowing what will work best for them. Also, it’s not like you’re not aloud to change mid-game, right?
Comment by Stephanie — April 8, 2007 @ 1:27 pm
I love the new, alternate theory. It fits nicely with kind of an over-arching principle I have for some of these topics. I think, regardless of Dave Ramsey, Suze Orman, or math, you should just do what is most comfortable and most effective for you. Stephanie says it exactly, “None of these are ‘one size fits all.’” I second that.
Comment by KMC — April 8, 2007 @ 3:42 pm
Stephanie, that’s an interesting take :)Seriously though, I think ultimately it matters more that you “snowball” the debt payment by throwing every cent you have at it, than exactly which method you choose.
Finance guy: I think you have a flaw in your argument. Say, after making all the minimum payments, I have an additional $100. If I pay that amount to loan 1, I reduce the total interest paid by $2.5, by paying loan 2, I reduce the total interest paid by $10 and by paying loan 3, I reduce the total interest paid by $5. So rather than look at which loan accrues the highest interest in a year, you need to look at which one you can impact the most. In this case, it is clearly loan 2, which is the highest interest loan, or method 1. I dont see how the compounding argument comes into play here, since not making the the payment on loan 2 will mean, you will pay 10% compound interest on that $10 you could have avoided!!
Comment by ispf — April 9, 2007 @ 11:02 pm
[...] Annoyed Snowball Debt Reduction Theory: Tired of trying decide whether paying off your credit cards by highest interest rate or lowest balance is better? Poorer Than You gives you another choice by arguing you should pay the most annoying balance off first. [...]
Pingback by Annoyed Snowball Debt Reduction - AMT To Disappear? - Personal Finance Advice — April 10, 2007 @ 6:59 am
Here is method # 4. Pick the bill that has a fixed high payment and yet the total is rather small(not your largest) In paying this off first your snowball will grow much quicker, psychologically this will encourage you to go on. ( My smallest balance has a payment of $!7 and my highest interest balance is $,10,900. the intermediate one I am working on has a balance of $2500 and a fixed payment of $140.. I will have this paid off in 7 more months and then will have a much larger amount for the next one. ) I decide on my method as I go. I have already switched from the highest interest!!!)Smiles and I love this discussion as I thought I was the only one trying to decide.
Comment by Joan T — April 16, 2007 @ 5:14 pm
Usually when I read about money, I am not a very happy camper! It was nice to get a good laugh for once!
Whatever method you choose, make sure you snowball until you are out of debt… 
Comment by Steve — May 5, 2007 @ 10:57 am
What is this so-called “debt” that everyone keeps talking about?
Comment by Pappy Blue Ribs — May 21, 2007 @ 12:34 am
I blieve small steps lead to big thngs. The fact that you are paying anything, big or small, high interest rate or low, is a step in the right direction.
Comment by bill — July 1, 2007 @ 7:13 pm
I love the annoyance theory! Currently I’m paying off my $600 Dell bill (lowest balance). Even though most of it is at 0%, it really torkes me off that they have $112 worth of charges at 24%. So - in that case it’s the most annoying and the one I’m going to pay off first. Then will be my next highest APR - also a lower balance.
Comment by Kira — July 19, 2007 @ 7:11 pm
Reader number 137
I work on the principal of getting rid of payments.
Alternative is to get rid of CC firsts as you can make extra payments anytime you have a bit of spare cash
Comment by rob in madrid — July 23, 2007 @ 2:53 pm
[...] ever (also her most popular post, so it really doesn’t need my publicity lol). It is called Alternate Debt Snowball theory: How Annoyed Are You? and I just LOVE [...]
Pingback by I started using an RSS feed reader, and I found my favorite post ever « I’ve Paid For This Twice Already… — August 7, 2007 @ 8:43 pm
We’re doing the higher-interest and most-annoying simultaneously. Because as fellow math-minded folks, Mr. Micah and I couldn’t stand the high interest 30% (!!!) on his credit card. So that’s paid off and we won’t put more on it.
While Trent’s right that this may not work for everyone because they might get too comfortable, it’ll at least get them down to one debt. And if they’re motivated to pay off debt, they’ll do it, IMO.
Comment by Mrs. Micah — October 13, 2007 @ 1:00 pm
I’ve been debating which theory to apply as loans 1 &2 (towards a home purchase) are against my 401K and don’t affect my credit history. Loan 3 is a student loan and has the highest payment relative to the amt owed. Loan 4 ,a personal loan borrowed to clear up debt to secure the mortgage, has a high interest rate and a high annoyance factor. Also annoying, Loan 5, a credit card that’s used to gap my income shortfall. And 6, another student loan on a graduated payment plan that’s set to readjust to a higher payment next year. In addition to the debts listed I have a motgage (100K) and home improvement loan (20K).
I’m leaning towards knocking off #3 first, opening a credit card ( 0% APR /12mo) to transfer the balance of #4. But if I pay off #1 first I can reborrow the money to put towards #4 ( at a lower interest). Any thoughts?
1.$1400 $60 5.95%
2.$1500 $30 5.95%
3.$1800 $120 5%
4.$3300 $150 15%
5.$4000 $60 12%
6.$15000 $113 7.8%
Comment by Lily — December 1, 2007 @ 9:56 am
First time visitor, stumbled it (thumbs up!). Can’t believe I haven’t come across your site yet. LOVE the layout! RSS’d up! As far as the post, no kidding. I paid off the last of my credit cards last year, and it is nice to be out. I used a 4th method. I got more money than I owed on my credit cards (raise) and then I paid them off and didn’t rack them up again.
Comment by hank — January 23, 2008 @ 12:38 am
[...] a clear head candidate), lowest balance to highest (often the heart’s choice), or simply start with the debt that bothers you the most (your gut speaks). So what do you [...]
Pingback by We’re Interest Order - How About You? | I've Paid For This Twice Already... — January 25, 2008 @ 6:01 am
Snowballing debt payments means to transfer credit card debt from a high interest rate card to a low interest rate card. By doing this you pay a greater amount of money towards the balance and less interest on debt.
Comment by Janni — March 25, 2008 @ 8:34 pm
No one mentioned the key actor in eliminating debt. That is of course to avoid creating additional debt. The method I employ is this: I want to be out of debt by the time I am 49. That means that I pay a fixed amount to each bill and never lower it. Then I focus extra earnings (i.e. 1/2 of raises to THE SMALLEST DEBT. Then I take the 1/4 and increase my 401k.The rest is spending money. I also pick up side work and place that money in an emergency fund. That way I do not use credit if car needs repairs. I also calculate my tax refunds into this plan, I have my debt (195,000) being paid off in 2014. But the main debt will be gone by 2011 with 3 additional years to pay the house off.
Comment by Matt — May 7, 2008 @ 8:35 pm