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.
Be rid of debts that make you unhappy.
Math usually works since high interest debts are more likely to be more annoying.
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!