Have you struggled with the question of paying down your smallest debt first, commonly called the debt snowball method, or paying down the highest interest rate first?
I’ve had this discussion with many as I’ve coached families on their finances. Both methods work in theory, but which method will most cause the most people to be successful over the long term.
I’ve advocated paying smaller debts first. It seems both Dave Ramsey and myself were right.
Pay Smaller Debts First: Dave Ramsey Was Right
The basics of the debt snowball involve paying your smallest debt first regardless of the interest rate.
It seems and is now proved by researchers David Gal and Blakeley McShane that the the debt snowball method wins over paying off your highest APR% first.
The researchers based their data off 6,000 people who paid off their debt and how they did it through a large debt settlement company.
So Dave Ramsey, Crown Financial, and many other groups and financial coaches were right. Behavior trumps math.
Behavior Trumps Math
Why doesn’t pure math work in personal finances? Simple. We are human and not robots. Humans aren’t 100% rational–we have emotions.
By using the debt snowball method, we’re able to see quick victories, get a boost and go on to fight the next battle.
“We conclude that there is evidence that the mere existence of achievable subgoals motivates early goal persistence,”- David Gal quoted in Moneyland.
We need to win and win quickly when approaching debt. If you try to eat that big elephant or even a small horse it’s going to take a while and most will just give up.
Small Victories = Success
As you approach your debt payoff, weight loss, or other goals. Both the research and antidotal evidence points toward setting smaller goals and achieving small victories as quickly as you can.
Action: Break down a goal into smaller subgoals. If it is debt–use the Debt Snowball Method. I’ll see you at the finish line!