Debt Snowballing

Anonymous · ‎03-31-2016

I have recently become obsessed with watching debt snowball videos on youtube. I only have one debt (student loan) and I have never personally had to use the debt snowball, but I love watching the progress of other people. Does anyone else do this? When I see someone pay off a debt I get really excited for them. I also find that watching the videos keep me from spending my free time on this site, which is probably good for me.

Does anyone else live vicariously through the financial wins of another (or am I just a creepo)?

QUAILMAN · ‎03-31-2016

Totally not creepy.

What is creepy is when people think that the ~~debt avalanche~~ approach makes any sense at all.

EDIT: See post below

Anonymous · ‎03-31-2016

@QUAILMAN wrote:
Totally not creepy.

What is creepy is when people think that the debt avalanche approach makes any sense at all.

Is it different than the snowball method?

QUAILMAN · ‎03-31-2016

Sorry, I meant the exact opposite of what I said.

It's creepy to use the snowball method. Avalanche all the way. Isn't the goal to save money?

Snowball is used by people who want to feel good by seeing their multiple loans go away. Avalanche is the sensible approach whereby you pay off your loans with the highest interest rates first, regardless of the total dollar amount.

Anonymous · ‎03-31-2016

@QUAILMAN wrote:
Sorry, I meant the exact opposite of what I said.

It's creepy to use the snowball method. Avalanche all the way. Isn't the goal to save money?

Snowball is used by people who want to feel good by seeing their multiple loans go away. Avalanche is the sensible approach whereby you pay off your loans with the highest interest rates first, regardless of the total dollar amount.

I have wondered why they don't do it by interest rates, but since I have not been in the position to do it myself, I'm trying not to be judgy. I think I would pay it off in the order i which it saves me the most money. But maybe these people get really motivated by seeing these small balances go away first. I think some wouldn't stick with it if they didn't see some major movement early on.

QUAILMAN · ‎03-31-2016

@Anonymous wrote:
I have wondered why they don't do it by interest rates, but since I have not been in the position to do it myself, I'm trying not to be judgy. I think I would pay it off in the order i which it saves me the most money. But maybe these people get really motivated by seeing these small balances go away first. I think some wouldn't stick with it if they didn't see some major movement early on.

That is the thought process for people taking the snowball approach, but I really wish someone would explain why it is such a terrible choice. Make a spreadsheet and compare the savings by taking the avalanche route instead. That should be enough motivation to keep them going!

Appleman · ‎03-31-2016

There are times where the Snowball method may make more sense. If one's DTI is high and you are closer to paying of a debt (say personal loan, jet ski or car) it may make more sense to get that payment off the books.

Also, using a tool like Undebt.it you can see the difference between the Snowball and Avalanche method. For some the difference between the two methods may make a difference of a month or two. Problem is this may be 5-6-7 years in the future. A lot can change in that time.

I agree with the premise, if you want to pay the least do the Avalanche. Once a plan goes beyond three years I would contend that there would be little difference between the methods and the chance of fully sticking to either plan greatly diminishes.

QUAILMAN · ‎04-01-2016

@Appleman wrote:
There are times where the Snowball method may make more sense. If one's DTI is high and you are closer to paying of a debt (say personal loan, jet ski or car) it may make more sense to get that payment off the books.
Your cumulative DTI will be the same no matter where you put the money. It doesn't matter if you put your extra $100 to "Big Loan A" or use it to close out "Little Loan B", your total Debt will always fall my the same amount. The only benefit is still the comfort of knowing you got rid of one loan completely.

Also, using a tool like Undebt.it you can see the difference between the Snowball and Avalanche method. For some the difference between the two methods may make a difference of a month or two. Problem is this may be 5-6-7 years in the future. A lot can change in that time.

I agree with the premise, if you want to pay the least do the Avalanche. Once a plan goes beyond three years I would contend that there would be little difference between the methods and the chance of fully sticking to either plan greatly diminishes.
Agreed. If the time horizon is short, you may not punish yourself much by doing what makes you happier (although if you asked for my opinion, I would give you the same advice everytime - avalanche).

Simply827 · ‎04-01-2016

@QUAILMAN wrote:
@Appleman wrote:
There are times where the Snowball method may make more sense. If one's DTI is high and you are closer to paying of a debt (say personal loan, jet ski or car) it may make more sense to get that payment off the books.
Your cumulative DTI will be the same no matter where you put the money. It doesn't matter if you put your extra $100 to "Big Loan A" or use it to close out "Little Loan B", your total Debt will always fall my the same amount. The only benefit is still the comfort of knowing you got rid of one loan completely.

Also, using a tool like Undebt.it you can see the difference between the Snowball and Avalanche method. For some the difference between the two methods may make a difference of a month or two. Problem is this may be 5-6-7 years in the future. A lot can change in that time.

I agree with the premise, if you want to pay the least do the Avalanche. Once a plan goes beyond three years I would contend that there would be little difference between the methods and the chance of fully sticking to either plan greatly diminishes.
Agreed. If the time horizon is short, you may not punish yourself much by doing what makes you happier (although if you asked for my opinion, I would give you the same advice everytime - avalanche).

I believe DTI is calculated by adding up your monthly payments and dividing it by your monthly income. In that case, eliminating a payment by paying off a smaller loan in full would indeed reduce your DTI.

From 144k CL to BK7- 7.19.24

QUAILMAN · ‎04-01-2016

@Simply827 wrote:
@QUAILMAN wrote:
@Appleman wrote:
There are times where the Snowball method may make more sense. If one's DTI is high and you are closer to paying of a debt (say personal loan, jet ski or car) it may make more sense to get that payment off the books.
Your cumulative DTI will be the same no matter where you put the money. It doesn't matter if you put your extra $100 to "Big Loan A" or use it to close out "Little Loan B", your total Debt will always fall my the same amount. The only benefit is still the comfort of knowing you got rid of one loan completely.

Also, using a tool like Undebt.it you can see the difference between the Snowball and Avalanche method. For some the difference between the two methods may make a difference of a month or two. Problem is this may be 5-6-7 years in the future. A lot can change in that time.

I agree with the premise, if you want to pay the least do the Avalanche. Once a plan goes beyond three years I would contend that there would be little difference between the methods and the chance of fully sticking to either plan greatly diminishes.
Agreed. If the time horizon is short, you may not punish yourself much by doing what makes you happier (although if you asked for my opinion, I would give you the same advice everytime - avalanche).

I believe DTI is calculated by adding up your monthly payments and dividing it by your monthly income. In that case, eliminating a payment by paying off a smaller loan in full would indeed reduce your DTI.

Ahhh gotchya. I was thinking more like the overall debt to your name. But your'e right, DTI is what you're required to pay each month divided by monthly income.