4 ms·

Harvard Study Shows Snowball Method Best Way to Get Out of Debt

11 points by humblebuck 10y ago

blastb 10y ago
The snowball method is nice in that it frees up monthly cash flow due to having to pay fewer minimum payments. In these situations, it can certainly be good. But in order to minimize payments overall, assuming you have no cash flow issues and self discipline, it's financially optimal to pay off your highest interest debt first (the avalanche method). I'm guessing it might feel psychologically better to pay off smaller debts as each of those paid off is a win, but it's financially irresponsible to recommend the snowball method to everyone.
- humblebuck 10y ago
  Thanks for the feedback, when I originally wrote this I actually detailed the stack method (same as avalanche). From my perspective it doesn't matter if you pay off a $100 credit card, but have $14,900 left in debt. You haven't really improved your situation. But after reading the results of the Harvard study I had to change the whole step. It turns out the psychological impact of seeing the size of the reduction on your smallest debt balance had staying power and kept people paying down debt. So I agree it's the most logical to pay the stack/avalanche method, but unfortunately we're all just a bunch of moist robots who don't always follow logic. Really appreciate the concern though, I was on your side before I ran into the study!
trendia 10y ago
> There’s typically fee’s associated with opening them. This is a typo. It should read: "There are typically fees associated with opening them."
- humblebuck 10y ago
  Great point! Thanks for taking the time to send the note!
t0mbstone 10y ago
sofi.com doesn't have loan consolidation fees. I consolidated $40k worth of credit card debt into one loan at 8% interest and have been paying it down at like $1000 a month. This method only makes sense if you also figure out how to control your credit card spending in the first place. I opened two checking accounts and set up direct deposit split between them. One checking account receives the exact amount of money I need for all of my monthly expenses (according to a budget), and the other checking account receives the extra money which I have allocated for "fun" spending. The snowball method never worked for me.
- humblebuck 10y ago
  Good for you on taking the action to get rid of debt and I agree the snowball method doesn't work for everyone, it just works for a higher percentage of people.
justboxing 10y ago
Here's the actual Harvard Study that the article references => "Research: The Best Strategy for Paying Off Credit Card Debt" : https://hbr.org/2016/12/research-the-best-strategy-for-paying-off-credit-card-debt https://hbr.org/2016/12/research-the-best-strategy-for-payin...
- humblebuck 10y ago
  Ouch, trying to simplify and help, but I can see how it could come off wrong. Thanks for the note.

11 points by humblebuck 10y ago

The snowball method is nice in that it frees up monthly cash flow due to having to pay fewer minimum payments. In these situations, it can certainly be good. But in order to minimize payments overall, assuming you have no cash flow issues and self discipline, it's financially optimal to pay off your highest interest debt first (the avalanche method). I'm guessing it might feel psychologically better to pay off smaller debts as each of those paid off is a win, but it's financially irresponsible to recommend the snowball method to everyone.

humblebuck 10y ago
Thanks for the feedback, when I originally wrote this I actually detailed the stack method (same as avalanche). From my perspective it doesn't matter if you pay off a $100 credit card, but have $14,900 left in debt. You haven't really improved your situation. But after reading the results of the Harvard study I had to change the whole step. It turns out the psychological impact of seeing the size of the reduction on your smallest debt balance had staying power and kept people paying down debt. So I agree it's the most logical to pay the stack/avalanche method, but unfortunately we're all just a bunch of moist robots who don't always follow logic. Really appreciate the concern though, I was on your side before I ran into the study!

trendia 10y ago

> There’s typically fee’s associated with opening them. This is a typo. It should read: "There are typically fees associated with opening them."

humblebuck 10y ago
Great point! Thanks for taking the time to send the note!

t0mbstone 10y ago

sofi.com doesn't have loan consolidation fees. I consolidated $40k worth of credit card debt into one loan at 8% interest and have been paying it down at like $1000 a month. This method only makes sense if you also figure out how to control your credit card spending in the first place. I opened two checking accounts and set up direct deposit split between them. One checking account receives the exact amount of money I need for all of my monthly expenses (according to a budget), and the other checking account receives the extra money which I have allocated for "fun" spending. The snowball method never worked for me.

humblebuck 10y ago
Good for you on taking the action to get rid of debt and I agree the snowball method doesn't work for everyone, it just works for a higher percentage of people.

justboxing 10y ago

Here's the actual Harvard Study that the article references => "Research: The Best Strategy for Paying Off Credit Card Debt" : https://hbr.org/2016/12/research-the-best-strategy-for-paying-off-credit-card-debt https://hbr.org/2016/12/research-the-best-strategy-for-payin...

humblebuck 10y ago
Ouch, trying to simplify and help, but I can see how it could come off wrong. Thanks for the note.