Debt Snowball Payoff - Answer I can't find ANYWHERE

[longtimelurker]

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@203bravo wrote:

It's more for motivation than anything else... the logic is once you see one debt paid in full then you can use the motiviation to keep paying other debts... sort of like a diet when you lose 10 pounds you are more motivated to stick with it.

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@Curious_George2 wrote:

The snowball method is a Dave Ramsey thing, right? I've never consumed his work product but I have a question: since the most financially sound way to reduce debt is to attack the highest-interest obligations first, why does he instead advocate for the costlier snowball method?

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Right, the claim is that "studies show" that people with large debts are more likely to succeed using the snowball, as meaningful change happens faster ("Instead of paying 7 credit cards, I am now paying only 6!" whereas putting money towards a large, highest interest rate, card can be almost invisible for quite a while)

Now as Ramsey is big business no idea how independent and unbiased those studies really are, and if it only applies to a certain type ("less numerate" for example).   I would hope that people would understand the going for the highest interest rate reduces overall costs, and thus, in the end, should make things better overall, but certainly if people can't stick to that plan, something that motivates better has a value.

[Horseshoez]

I guess I'm not the sharpest knife in the block as I fail to understand virtually everything I've ever read about the Ramsey methods; "Debt Snowball Payoff" included.

To me at least, when I had a number of credit cards which needed tending to, I prioritized the card(s) charging the highest interest rates first, everything else got the minimum plus a few dollars.  As the highest interest card(s) was/were paid off, the focus shifted to the next hightest, and so on.  True, I didn't see some cards, which I suppose I could have paid off much earlier, get paid in full for nearly a year, but in the end I probably spent at least a couple thousand less in interest by following the highest interest first plan.

[Curious_George2]

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@Horseshoez wrote:

I guess I'm not the sharpest knife in the block as I fail to understand virtually everything I've ever read about the Ramsey methods; "Debt Snowball Payoff" included.

To me at least, when I had a number of credit cards which needed tending to, I prioritized the card(s) charging the highest interest rates first, everything else got the minimum plus a few dollars.  As the highest interest card(s) was/were paid off, the focus shifted to the next hightest, and so on.  True, I didn't see some cards, which I suppose I could have paid off much earlier, get paid in full for nearly a year, but in the end I probably spent at least a couple thousand less in interest by following the highest interest first plan.

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This is a good reminder of an important question some of us (🙋‍♂️) have overlooked: how much difference does it make? Seems like a fun spreasheet challenge when I have the time, unless someone else tackles it first. 

[Brian_Earl_Spilner]

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@Horseshoez wrote:

I guess I'm not the sharpest knife in the block as I fail to understand virtually everything I've ever read about the Ramsey methods; "Debt Snowball Payoff" included.

To me at least, when I had a number of credit cards which needed tending to, I prioritized the card(s) charging the highest interest rates first, everything else got the minimum plus a few dollars.  As the highest interest card(s) was/were paid off, the focus shifted to the next hightest, and so on.  True, I didn't see some cards, which I suppose I could have paid off much earlier, get paid in full for nearly a year, but in the end I probably spent at least a couple thousand less in interest by following the highest interest first plan.

You have a goal in mind, know what you want/need to do, and can stick with it.

Most people don't care about how much more money they could save by doing it a different way. They just want to pay off their debt as quickly as possible.

Ramsey's methods are psychological based. Change the way you look at money and debt. Change your behaviors. Produce quicker gratification.

[Remedios]

Well, it might have a psychological effect until one realizes that while they were paying of smaller balances, the amounts on larger balances are increasing (most of the time minimum payment is enough to drop the balance). 

At the same time, if minimum was paid on smaller balances, it might decrease balance. 

So while time and money are being wasted (with accumulated interest being directly proportional balance), next psychological effect is being totally demoralized. 

If one needs to decide what to pay, scores are probably trashed at that point in time, so finances seem to be the next obvious choice. 

[Brian_Earl_Spilner]

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@Remedios wrote:

Well, it might have a psychological effect until one realizes that while they were paying of smaller balances, the amounts on larger balances are increasing (most of the time minimum payment is enough to drop the balance). 

At the same time, if minimum was paid on smaller balances, it might decrease balance. 

So while time and money are being wasted (with accumulated interest being directly proportional balance), next psychological effect is being totally demoralized. 

If one needs to decide what to pay, scores are probably trashed at that point in time, so finances seem to be the next obvious choice. 

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While that may be so, paying 3 out of 4 cards off in two months, rather than 0 out 4 in 9 months has a positive effect on people. They feel like they're 3/4 of the way to their goal. Now if you look at the finance side, what they paid off was a blip and they're nowhere near close to their goal of paying off all debt. But, some people need that little boost to keep going no matter how superficial it may be.

[RSX]

@Curious_George2 

there is already a spreadsheet out there - makes the calculations super easy

i have been using it for the last 10 years or so

https://www.vertex42.com/Calculators/debt-reduction-calculator.html

[Curious_George2]

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@RSX wrote:

@Curious_George2 

there is already a spreadsheet out there - makes the calculations super easy

i have been using it for the last 10 years or so

https://www.vertex42.com/Calculators/debt-reduction-calculator.html

You're right. That's it exactly. Looks cool from the screenshots. Nice that you have experience with it. 

Have you (or can you) run simulations? What is the magnitude of the difference in total interest paid using the snowball method vs. avalanche? Obviously much depends on the parameters used in the simulation, but can you get a feel for it in general terms? 

[longtimelurker]

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@Curious_George2 wrote:

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@RSX wrote:

@Curious_George2 

there is already a spreadsheet out there - makes the calculations super easy

i have been using it for the last 10 years or so

https://www.vertex42.com/Calculators/debt-reduction-calculator.html

You're right. That's it exactly. Looks cool from the screenshots. Nice that you have experience with it. 

Have you (or can you) run simulations? What is the magnitude of the difference in total interest paid using the snowball method vs. avalanche? Obviously much depends on the parameters used in the simulation, but can you get a feel for it in general terms? 

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Well, in non-real terms, it can obviously vary from 0 (where the descending APR order matches the descending loan size, so the two approaches are the same) to "much much bigger"   where you have a very large loan with a huge APR, and lots of smaller loans with small APRs, so you don't get round to dealing with the higher APR one for a very long time.

[SouthJamaica]

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@Anonymous wrote:

Hello! I've started the debt snowball factor to finally rid myself of the final debt I have (Thank gosh) 

I've looked EVERYWHERE for this answer, can't find it, and hopefully, someone can help me because I've read so much other good info from here. 

I know the snowball steps and my question is about Step 2. Because I'm not going to be using my CCs any longer my minimum payment will go down (barring interest rate not changing, promotional purchases, etc) over time on those debts 'in waiting'. When those min payments do go down do I then change my monthly payment to match the new min payment and then move the extra $ to the largest amount OR do I continue to make the min payment that I started with? Or does it even matter which route I take - I want to ensure I'm doing what I should be. 

Step 2: Make minimum payments on all your debts except the smallest.

Thanks so much!

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Never make minimum payments. Make minimum payment + $5.

Your minimum payments won't go down as much as you think.  So don't worry about that.