The Debt Snowball

by Site Author

Dave Ramsey, a radio personality, promotes a strategy for paying off debts that he calls the “debt snowball.” Ramsey argues that debtors should pay off their smallest debts first.

That strategy makes economists cringe, because it can mean ignoring debtors’ highest-interest debts. Consumers who follow the strategy might end up paying more in interest than they would if they focused on their highest-interest debts first.

But Ramsey argues that there are psychological benefits to starting with the smallest loans.

The reason we list [debts from] smallest to largest is to have some quick wins… When you start the Debt Snowball and in the first few days pay off a couple of little debts… it lights your fire… When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathematically yet. You have however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works.

In a recent lab experiment, two economists, Alexander Brown and Joanna Lahey, try to test whether the debt snowball works. They give participants the tedious task of copying ten-character strings. Some participants were given ascending columns of strings that looked like this:

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Other participants were given the strings in even columns that looked like this:

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The authors found that participants worked faster when facing ascending columns. Participants took 11.08 seconds per string to fill in the first worksheet above, versus 12.13 seconds per string to fill in the second. In other words, starting with the smaller tasks seemed to help. The study ends up suggesting that Ramsey may be onto something. Completing small goals energizes you to complete larger goals.

The debt snowball might also be useful for people who are just trying to get things done at their desks. Starting off with a few small, easy tasks might help them gear up for the bigger, tougher tasks on their to-do list.