What Is a Debt Snowball?

If you've hung around this site for any length of time, you have no doubt read about our adventures in finance. We've been on the journey to financial peace for about four years now, and a good portion of that time was spent working on our debt snowball. Dave Ramsey talks a lot about the debt snowball, and it's probably one of the most controversial principles he teaches on.

Debt snowball
Debt snowball

Let's start by talking about what the debt snowball is (taken from Dave's website):

List your debts, excluding the house, in order. The smallest balance should be your number one priority. Don’t worry about interest rates unless two debts have similar payoffs. If that’s the case, then list the higher interest rate debt first.

Here is an example of what our debt snowball looked like when we started:

Debt Total Payoff Minimum Payment
Student Loan 1 $1,177.87 $8
Student Loan 2 $1,743.85 $6
Student Loan 3 $2,176.17 $8
Student Loan 4 $4,904.12 $17
Student Loan 5 $6,228.03 $22
Student Loan 6 $11,317.05 $74
Jeep Loan $10,495.05 $300
Credit Card $1,729.91 $23
TOTAL $39,772.05 $458

If you know anything about math and interest rates, your first question (as was mine) would be, "Why wouldn't you pay off the higher interest rate first?" This is where Dave Ramsey goes against conventional wisdom. Yes, of course it makes the most sense to pay off your debts in interest rate order, but this is not an mathmatical problem.

If you're like most Americans, the problem is not math, the problem is behavior.

We were very fortunate to have found Dave Ramsey when we did. We had almost $40,000 in debt, but our situation was not near as severe as some of the folks I've heard call into his radio show. Our biggest stupid tax (which is what Dave calls a bad financial decision that you learn from) was borrowing money from my in-laws to finance a Jeep we couldn't afford, and buying a house before we were financially ready.

Side note: The mortgage isn't part of the debt snowball unless you have a second mortgage, in which case Dave says you can either include it in the debt snowball or wait to attack it during baby step six (paying off your home early).

The big reason why the debt snowball is not set up on math but rather set up on behavior and feelings is that if we are piling up a lot of debt on credit cards, or taking out loans for things we can't afford, clearly we don't understand how interest and math really work. We see a payment fitting into our monthly expenses and don't take the time to figure out the cost of financing something over the long haul.

The key to winning with money is making interest, not paying it.

We needed to change our behaviors in spending money before we could start to climb out of the mess we'd gotten ourselves in. When you start paying off your debts smallest to largest, you start to get a feeling of winning. Once we paid off the first few debts quickly and easily, it gave us confidence and built the muscle we needed to move some bigger weights.

The further along we went, the longer it took us to pay off the next debt. Had we started with the highest interest rate and took longer to pay off the first one, we might have slipped back into our old habits and given up on the goal. We are creatures of habit, you know! And when the going gets tough, we have a tendency to slip and fall.

Once we grasped the behavior concept behind the debt snowball, it wasn't too difficult to see that we needed small wins along the way to keep us motivated. That's why they call it a snowball.

As you roll it along, it grows bigger and bigger and soon enough you get to push that big snowball down a hill and watch roll away forever.

However, the debt snowball can be a very long journey depending on how much you have to pay off. Along the road you have to do what is best for you. For us, that meant shifting around a few of the debts.

For instance, we decided that we didn't like the feeling of owing Kelsey's parents money for our Jeep, so although it was 0% interest, we decided to pay it off quicker even though it was a larger debt. The feeling that was lifted when we wrote them the last check was totally worth more than the interest we paid on our other debts in the meantime. Sometimes things don't make sense on paper, but they feel right.

We buckled down, stopped eating out multiple times per week, got second jobs, and paid off almost $40,000 of debt in 23 months. It's amazing what you can do when you put your mind to it.

After refinancing our house in April 2012, we came back to the debt snowball step and paid off our second mortgage. It's flippin' amazing to know that we don't owe anyone money other than our first mortgage. And our sights are set on marching forward on our financial journey and someday (sooner rather than later) burning that mortgage altogether.

How would you attack paying off your debts?