Why Dave Ramsey is Wrong About the Debt Snowball (And What to Do Instead!)

Debt can feel overwhelming, but it doesn’t have to. With the right plan in place, you can take control of your money and get out of debt fast. In your journey to be debt-free, you’ll run into the financial guru, Dave Ramsey. He’ll preach the merits of his debt repayment system, the debt snowball. 

I was one of those debt-free hopefuls following Dave, but then I asked, “Is there a better way to do this than the debt snowball?” That led me to a different method called the debt avalanche.

Both the debt snowball and debt avalanche get you out of debt far faster than minimum payments, but which one is better to use? 

Before we compare, let’s explain how each accelerated debt repayment system works. 

What is the Debt Snowball?

Dave Ramsey has made the debt snowball repayment method famous. More than 5 million people have participated in his financial plan Financial Peace University

You use the debt snowball in step 2 of his program (after a $1,000 emergency fund).

[Editors Note] What follows is a review of Debt Snowball Vs. Debt Avalanche, while we agree both methods have merit, we completely disagree with Dave Ramsey on just maintaining a 1000 dollar emergency fund. See; How to Get Your Life Together (Financially) for more info. 

The debt snowball method lists your debts from smallest to largest by the principal. The principal means the total you owe. Do not include a mortgage on the list. It has its own baby step later.

For example, if you owed $1500 to your mom, $25,000 on a credit card, and $15,000 on a car, you would list them in this order: 

  1. Mom – $1500
  2. Car – $15,000
  3. Credit Card – $25,000

Now, work down your list. Pay the minimum on everything except the smallest debt. Then, you attack that debt with a vengeance. Do this by finding out how to save money every month and earning more with a weekend job. Any extra from saving or earning goes toward paying off debt.

Once you pay off the smallest debt, start using the payments from that debt on the next lowest principal. 

For example, let’s say every month you pay $100 to mom, $300 toward the car, $500 for the credit card, and you can put an extra $100 a month into getting out of debt. That’s a total of $1,000 a month. 

Here’s what that looks like starting:

  • Mom – $100 minimum + $100 extra
  • Car – $300
  • Credit Card – $500

Once mom is paid off, roll the payments into the car.

  • Car – $300 + $200 extra
  • Credit Card – $500

Finally, once the car is paid off, roll the payments into the credit card.

  • Credit Card – $500 + $500 extra

Once that’s paid off, you’re debt-free!

It’s a straightforward way to attack debt. You don’t need a degree in finance or math skills to understand it.

What about the debt avalanche?

What is the Debt Avalanche?

The debt avalanche is an accelerated debt repayment method that involves listing your debts from the largest interest rate to the lowest. Don’t include the mortgage.

For example, say you have the following loans:

  • Student Loans – $5,000 at 5%
  • Credit Cards – $10,000 at 15%
  • Personal Loan – $6,000 at 4.25% 

Here is the order you would repay them, according to the debt avalanche method:

  1. Credit Cards – $10,000 at 15%
  2. Student Loans – $5,000 at 5%
  3. Personal Loan – $6,000 at 4.25% 

Pay the minimum payments on each loan, except for the one with the largest interest. This method also encourages minimizing your lifestyle and starting a side hustle to increase the rate you pay off your loans. 

Allocate any extra money toward paying down the highest interest loan until it is paid off. 

Then, roll the money into paying off the next debt on your list. Continue down the list until you are debt-free!

So, how do these two stack up? Let’s look at it mathematically and psychologically. 

Debt Snowball vs. Debt Avalanche, the Math

Meet Joe. Joe is $50,000 in debt. Yikes! Here’s what his debt looks like now:

Loan TypeBalanceInterest*Minimum Payment
Student$5,0005%$71
Car$10,00010%$184
Personal$15,00015%$338
Credit Card$20,00020%$534

*These interest rates are entirely made up for illustration purposes. Please, hunt for better interest rates if you take a loan.

Joe decides to crush his debt, but he can’t decide between the debt snowball and the debt avalanche. Both seem like a great idea. To help him decide, he found a debt snowball & avalanche payoff calculator.

He plugs in his balance, minimum payments, interest rate, and type of debt. Then, he enters the total monthly amount he can put towards getting out of debt. 

He starts his calculations with the minimum payment total of $1,127, with no extra payments. He finds that he saves $31 by using the debt avalanche — not much. 

Then, he experiments with what happens when he starts paying extra. He does this in $20 increments up to 1,000 extra dollars every month. A very clear pattern emerges. 

Here’s a chart of his results:

*If you want to look at the full data set, you can view it here. If you want to mess with the numbers, click “File” and “Make a Copy.”

The red line is the debt avalanche, and the blue line is the debt snowball. The lower red line means the total amount paid using the debt avalanche is lower. 

In other words, the avalanche cost up to $3,711 less overall and was finished 1 to 3 months sooner than the debt snowball for the same debt!

Back to us for a second; in fact, there are no instances where you will pay less money overall using the debt snowball than the debt avalanche. It is mathematically impossible. The best the debt snowball can hope for is to match the debt avalanche.

That would only happen in the rare case that your debts are listed in the same order for both methods.

In short, mathematically, the debt avalanche wins hands down

Debt Snowball vs. Debt Avalanche, the Psychology

The math strikes a hard blow, but Joe has heard Dave Ramsey ranting and raving about the debt snowball. He decides to look at Dave’s reasoning.

“Money is 20 percent head knowledge and 80 percent behavior.” No argument there. “You need some quick wins to stay motivated.” Interesting. 

Knowing he’s saving thousands and getting out of debt faster overall is a powerful idea, but is that enough? He decides to take a more in-depth look. 

Dave often cites a study by the Harvard Business Review to back up his use of the mathematically inferior debt snowball.

The study conducted three separate experiments to find the best debt repayment methods, as shown by the “stick-with-it-ness” of each technique

Keri Kettle, Simon Blanchard, Gerald Häubl, and Remi Trudel obtained a large proprietary dataset from a financial guidance company, HelloWallet. The data covered 36 months and nearly 6,000 people with an average of 2.5 credit cards. The data only accounted for credit cards and not all debt types like car loans, personal loans, or student loans. 

The data gave them a few hypotheses to test.

First, whether concentrating on a single debt or spreading payments equally among accounts was more effective. 

Participants began with five equal debts and were divided into two groups, one paying off all five equally and the other concentrating on one at a time.

To pay off the debt, participants played an anagram-like game. They found the one-at-a-time payment group repaid 15% faster than the equal payments group.

So, point for snowball and avalanche.

Debt SnowballDebt Avalanche
11

The second experiment tested whether paying on one or just a few accounts at a time increased the perception that participants were getting debt-free faster

They overwhelmingly concluded that was the case.

Another point to both teams.

Debt SnowballDebt Avalanche
22

The final experiment tested a series of hypotheses that found that the portion of the debt they paid off had an impact on the participant’s motivation. 

That means if they paid off 10% of one debt, instead of 2% of 5 debts, they were more motivated to continue. 

Here the debt snowball takes a slight edge. You can pay off a larger percentage of a smaller debt with the same amount of money. For example, paying $100 toward a $1,000 debt pays 10% of the debt off. The same $100 toward a $2,000 debt pays off 5%.

However, the debt avalanche is still much better psychologically when compared with spreading out your payments equally among debts.

So, debt snowball gets the point, and the debt avalanche gets nine-tenths of a point.

Debt SnowballDebt Avalanche
32.9

Before Dave takes a victory lap, Joe reads the conclusion of the study. 

“To the extent that a consumer’s debt accounts have similar interest rates, he or she should concentrate repayments first on the cards or accounts with the smallest debts, paying off those first.”

Aha! They do give the nod to the debt snowball, but with the caveat that the debts need to have “similar interest rates.” The study does not specify what “similar interest rates” means, but Joe is sure a 15% difference between his largest and smallest interest probably doesn’t qualify. 

Back to us, it also doesn’t mean the debt snowball is better psychologically if you do have “similar interest rates.” It’s slightly better to use the debt snowball. Motivationally speaking, it’s like getting a 100 versus a 99 on a test. It doesn’t matter.  

Conclusion

So which debt repayment method is better?

The debt avalanche is overwhelmingly better mathematically. The amount of money and time saved is substantial.

Psychologically, the two are almost indistinguishable, but the debt snowball has a tiny advantage. 

Taken together, the debt avalanche is a much better all-around option for repaying debt than the debt snowball.

Dave Ramsey is still due to a ton of credit for helping millions to get out of debt, even if it isn’t the best method to do so. 

What debt repayment are you using? Has this article changed your plan of attack? Let us know in the comments!

 

 

About the Author

Caleb Jones is an unapologetic Content Marketing Consultant, influential Personal Finance Writer, happy dad, happier husband, and can’t decide between Star Wars and Star Trek. He’s gone through Dave’s Financial Peace University and can prove he’s wrong about the debt snowball. You can find him at his blog monkeyseemonkeydough.com.

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