When it comes to debt repayment, there are two prevailing methods. The first is the avalanche method, which has borrowers pay off the debts with the highest interest rate first. It is the most financially efficient since it results in the least amount of expense. Opposite this approach is the snowball method, which has borrowers pay off the smallest balances first. It provides a psychological boost that, despite being more costly, encourages individuals to stick with it.
I am not a fan of the the snowball method. I personally think it assumes that people are too weak or too stupid to choose the approach that, at the end of the day, puts the most amount of money in their pocket. I’m also irked by financial experts like Dave Ramsey who preach it as if it’s some kind of marketing based gospel. Nonetheless, I understand its merits and I don’t ignore the research that supports its effectiveness, at least psychologically anyway.
As a financial advisor, I’ve seen firsthand how large of a role psychology and human behavior can have on our financial lives, which is why for some people it really doesn’t matter how much more money a particular solution can provide if there’s one that makes you feel better sooner than later. This is how people become attracted to strategies like the snowball method. It offers greater short term gratification for being the less financially optimal solution. We humans are *funny* like that.
Throughout life we’re constantly nudged to forget the middle ground and choose sides. In personal finance, for example, it’s either active or passive investing, term or permanent insurance, pre-tax or after-tax contributions and so on. Some say our inability to compromise is because of existing social structures that discourage independent thinking. Others cast blame on the media for dumbing us down to the point where our biases replace facts. There are even those point to very educational institutions that taught us how to think in the first place. But no matter the reason, we usually pick one or the other.
After recording a podcast with U.S. News last week, I got into a conversation with the host about these debt repayment methods and why people feel the need to choose between the snowball and avalanche method instead of some kind of mixed solution. He believed it was all *packaging* or marketing and then pointed me in the direction of his colleague, Beverly Harzog, whose blog discusses all this and more. In her post, Beverly introduces a hybrid repayment strategy called the blizzard method. Here’s how it works:
- Start by paying off the smallest balance first.
- Then payoff the balance with the highest APR.
- Then payoff the balance with second highest APR and so on until your debt is gone.
As you can see, the blizzard method starts with the snowball method before switching to avalanche. By doing so, it provides an upfront moral and psychological victory in hopes of then giving you all you need to take advantage of the more cost-effective avalanche method. I find it to be a clever, practical and easy to explain compromise that could be more effective than simply having to choose one method over the other.
As an alternative to the blizzard method, I’ve come up with a debt repayment method of my own. Unfortunately, I don’t have a snow themed name for it but it works like this. Using a snowball vs. avalanche calculator, calculate the amount of money you would save in interest by using the avalanche method. Take 50% of that amount and budget it towards something for yourself. It might be an extra trip to the coffee shop or buying some new clothes but, whatever it is, make sure it’s something that reminds you to keep attacking your debt.
Like the blizzard method, my hybrid method provides both the psychological benefit of getting something in the “right here and now” along with the financial benefit of paying less interest over time. More importantly, it lets you know exactly how much money you’re saving/spending, which is critical to truly understanding how this decision relates to your financial goals. And make no mistake about it, this is where the real power lies.
I’m all for psychological tricks that ultimately help improve your financial situation, but when they involve leaving money on the table it’s usually an indication that there is a better option than simply choosing to go all in on one method over another. Ultimately, these situations are an opportunity to think more critically about your options so that you can come up with a solution that’s not just more effective, but also specific to your individual situation.
We wanted to see which method you thought was best. Here’s what you had to say:
Which is the better debt repayment method?
Avalanche = attack highest rates first
Snowball = attack smallest balances first
— Douglas A. Boneparth (@dougboneparth) June 2, 2019