Listen, I was skeptical when I read the title of this article from Semi Retire Plan as well. The Debt Snowball Method… that’s for people who don’t know about math!
For those of you who don’t know what the debt snowball method is, quickly:
The debt snowball method essentially is paying off your smallest debts first and moving on from there, regardless of if your smallest debt has an interest rate of 2% or 25%.
The theory is that as you get small debts paid back, the momentum starts to pick up and it gets easier to pay the bigger debts back.
While I do not support this method (I think paying off your highest interest rate debts first is a no brainer), there are some really interesting phycological implications behind the debt snowball method that can be applied broadly across your life (which is why Dave Ramsey is a big fan of the strategy).
Learn more about these great lessons below.
Why would pay off debt early?Aggressively getting out of debt early has several advantages. You will:
- Reduce your total amount of interest paid over the life of the loan by effectively shortening the loan term
- Have extra cash leftover each paycheck after you finish paying off each loan
- Increase your net worth with certainty – without the volatility that accompanies more traditional investments
How the debt snowball worksUsing this method, you order your debts from smallest to largest. You can exclude your primary residence’s mortgage if you have one. Then, pay the minimum payment on each debt plus extra (the most you can afford) on the one with the smallest balance. Once the smallest debt is paid off, you pay extra on the next lowest. Repeat until you’re debt-free, then stay out of debt!
Problems with the debt snowball methodThe controversial element to this is that the debt snowball does not consider the interest rates of your debts when prioritizing. Mathematically, you would benefit most by paying off your highest interest debts first. There’s a name for this approach – the “debt avalanche.”
DopamineNeurotransmitters are chemicals that transmit between neurons or nerve cells. Dopamine, the “feel good” neurotransmitter, helps us focus and makes us feel happy when we meet our goals. The debt snowball method is structured to help you achieve wins as quickly as possible since you’re paying extra on your smallest debts first. By completing the initial goals rapidly, you are getting dopamine spikes more often. This makes you feel good, which makes you want to repeat the behavior. It also keeps you focused on your plan.
EndorphinsWhen you are exercising, stressed, or excited, endorphins are then released by the pituitary glands and the hypothalamus. They produce a feeling of relief and being pain-free. In addition to killing pain, endorphins can act as antidepressants, sleep enhancers, and even as self-esteem boosters. Debt is stressful. But by facing it head-on and pushing yourself to spend less and pay more against your debts, you will experience emotional pain relief from endorphins. A little extra sleep and self-esteem can always help too, right?
OxytocinOxytocin spikes during emotional moments, and it makes you feel high. It’s primarily associated with moments of feeling unity and trust, and it strengthens personal connections. When people are paying off debt with intensity, it feels like they’re a part of a movement that is greater than themselves. They’re a part of a community, all pursuing freedom. Dave Ramsey, who popularized the debt snowball, invites listeners to do a “debt-free scream” on the radio show each day — these are clear high moments after stressful fights for financial freedom.
How to use this knowledge
ConditioningRussian physiologist Ivan Pavlov, whose studies are now synonymous with his name, researched appetite, and involuntary responses. His famous work with dogs actually shows how our behavior changes when we start to achieve our goals. In Pavlov’s study, he rang a bell or played the metronome while dogs were eating. After repeating these conditions, the dogs eventually would salivate at the sound of the bell even if the food was not present. This is called classical conditioning.
Set small, quickly achievable goals that ladder up to your big plansThe debt snowball benefits from having pre-set small goals in place. Each debt you pay off is a goal you are achieving. But, if debt freedom isn’t your current focus, then identify what’s most important to you in life. Next, break your long-term financial goals into concrete, smaller steps.
Do something stressful — it can be valuable and fulfillingWe often hear that chronic stress can be unhealthy. But, the right amount of “good stress” can help you feel motivated, resilient, and focused. You can even turn bad stress into good stress by thinking positively about the possible benefits of the situation.
Seek moments of unity and trustDo you have family members or friends who are pursuing common financial goals with you? Working with others towards a common purpose isn’t just a pleasant idea. You’ll experience a real rush of oxytocin and gratification when you reach milestones along the way. Even a pat on the back or a supportive hug can send out oxytocin that helps to dissolve the short-term stress and pain.
One small goal you can achieve today if you are not already is to start investing! Getting started is easy and will set your future self up for success.