Throwing Snowballs at the Financial Celebrities

There are two popular ways to pay off debt: the Debt Snowball and the Debt Avalanche (also known as Debt Stacking). There are other ways, but they are not as effective. For example, spreading payments across all debts owed doesn't work as well as attacking one debt at a time. We'll focus only on the Debt Snowball, Debt Avalanche, and a hybrid approach.

Both the Debt Snowball and Debt Avalanche are effective, but the Ramsey Personalities will have you believe otherwise. Don't believe their hype. Dave Ramsey has popularized (not invented as some believe) the Debt Snowball and emphasizes it to the point of excluding other viable methods. The unfortunate result of such a popular financial celebrity getting behind a concept is that you get only part of the information (the part he wants to give you). It's easy to believe a particular method is the best/only way of accomplishing a goal when it's all you hear about. Some people will believe what Dave Ramsey says just because he's rich. This fallacy impairs good decision-making and is financially hazardous. You're smarter than that.

Both methods do require sufficient income in order to apply enough toward the principle balances. Lower income will slow/halt debt repayment, especially if interest outruns payments (payday loans are notorious for this). This article assumes you can make progress regardless using one of the two methods. If not, then you may have to take more aggressive measures like an additional job or debt consolidation (doing so with extreme caution).

Summary of Debt Snowball and Debt Avalanche

Let's summarize the two methods and then discuss what's right/wrong with each:

The Debt Snowball emphasizes psychology. Debts are listed smallest balance to largest without regard to interest rate or other factors. The Ramsey Personalities put far too much emphasis on this point. The first debt is paid off and then the money that was being used on that debt is rolled over to the next balance and so forth until all debt is gone. According to studies, most people get motivation and sustain progress from the "quick wins"of paying the smallest balance first and working toward the largest.

On the other hand, the Debt Avalanche emphasizes math by paying off the highest interest rates first, thus saving total interest paid and usually paying off the debt off faster. Individual balances, interest rates, and length of repayment are all factors that must be considered. The Debt Avalanche is otherwise identical to the Debt Snowball in methodology. People who don't need "quick wins" can sustain motivation and progress, though this isn't as big an issue as it might seem. Remember, the Debt Avalanche is not the highest balance first. This is commonly used as an argument against it even though it is inaccurate.

Snowball = smallest debt first, then work way to largest; Avalanche = highest interest rate first, then work toward smallest.

Either method works for eliminating debt if you understand how they work and make an informed decision about what's best for you. Any financial celebrity who tells you that one doesn't work is lying. Having a preference is one thing, but being intentionally deceitful and withholding information is unethical conduct by any so-called financial expert.

The Debt Avalanche is like a bicycle. If you have the ability to ride only a tricycle, you can't point at the big kids on bicycles and say, "Those bicycles you're riding don't work." If you can't ride a bicycle, then that doesn't mean there's something wrong with the bicycle. You can't spread lies through the neighborhood about bicycles not working when they clearly do.

Dave Ramsey says in his blog, "How does the Debt Avalanche work? It doesn't. And the steps are a bit vague." This couldn't be further from the truth. The Debt Avalanche does work and the steps are identical to the Debt Snowball, except debts are paid by interest rate rather than balance.

We even verified with Ramsey's staff, who administer both Ramsey's and Hogan's sites, that the blog entry was intentional and verified multiple times before being published (see below). We tried to give them the benefit of the doubt that it may have been an error, but the staff's retort proved our original assessment was correct: Hogan-Ramsey is deliberately lying. We weren't questioning the Debt Snowball, but rather the misinformation that was on the blog.

Indebtedness has Nothing to do with Mathematical Ability

Dave Ramsey says, "If you were good at math, you wouldn't be in debt" in order to prove the Debt Avalanche is ineffective.

This has to be the most ridiculous of Ramsey's sayings, but people believe it and repeat it as if it's some profound revelation. All of us here at Stone Money Foundations have taken advanced math: Calculus I, II, and III; Differential Equations; Complex Variables; Linear Algebra; Discrete Math; and other courses like advanced physics and engineering that actually use those maths. We're definitely good at math!

Proficiency in math has nothing to do with indebtedness. A financial celebrity who dismisses one's education and debt with a smart-assed quip like this is not only arrogant, but ignorant. People get into debt for dozens of reasons, but what's important is how they get out of debt. Past situations shouldn't be used as reasons not to implement certain methods of debt repayment. You should use all available tools, including math and psychology, to pay your debts. Don't let a financial celebrity tell you you're too stupid to do so.

Ramsey recently had to change his quote to, "If you were paying attention to math..." because we busted him on his faulty logic. This new version is just as bad because it still makes no sense.

What's Right/Wrong with the Debt Snowball?

Nothing, if you've been presented all the information necessary to make an informed decision and you choose it as your method to eliminate your debt.

Everything, if a financial celebrity presents the Debt Snowball to you as the only option to eliminate your debt while also doubling down on other methods through half-truths and outright lies. When a so-called financial expert withholds information from you, you should be highly suspicious and always question why.

The Debt Snowball can benefit people who need the psychological motivation from paying off smaller debts first. There's nothing wrong with that. You just have to understand that debt repayment usually incurs more interest because repayment takes longer. This is a math problem. A good calculator will show the payoff period with total interest.

What's Right/Wrong with the Debt Avalanche?

The same thing as the Debt Snowball--if presented as the only option, then you're misinformed. If it's part of informed decision-making, great.

The Debt Avalanche can be effective in accelerating debt repayment and thus reducing the amount of interest paid overall. We cannot emphasize enough that you must do the math and figure out the advantage/disadvantage to doing either method. Forbes has a great article on this.

What about a Hybrid Method?

A hybrid of the Snowball and Avalanche maximizes the effectiveness of your debt repayment. You should list all your debts and do a thorough assessment on how those debts impact you. Critical Debts (payday loans, same-as-cash loans/deferred interest loans, family loans) must be paid first. The nonsense of "list your debts smallest to largest without regard to anything else" will cause problems if you don't consider everything associated with your debt.

If you have a nagging $100 loan, then it makes no sense to leave it sit as you pay off higher-interest debts. Get rid of it. It seems like the Debt Snowball, and it is to a degree, but it's deliberate. If you have a payday loan at 100% APR, then it doesn't make sense to rank it after smaller balance loans. Alternating between the Snowball and Avalanche won't harm your debt repayment at all. They are not mutually exclusive and using them together can yield the same results (or better) than using one individually.

Conclusion

When financial celebrities push particular methodologies at the exclusion of all others, you really need to ask yourself what their purpose is. It's likely that their support is tied directly to their brand (i.e., increasing income and popularity). Dave Ramsey, a man "with all the letters behind his name" (CFP, CFA, CPA, ChFC, CIC, or whatever), knows that the Debt Avalanche works, yet choses to lie about it. This can be to your detriment if you believe him. Always do your homework for anything that can affect your life.