Snowball Versus Avalanche

Dave Ramsey is widely criticized for advocating the debt snowball. His critics counter with the debt avalanche. Though I’ve nattered on about this topic before, I’ve never pulled everything together on this topic in one place. Until now.

Second, let’s define terms. First, let’s examine where there is agreement between Dave and his critics.

Debt is dumb.

They say Abraham Lincoln freed the slaves. He didn’t. My great-great grandfathers spilled their blood in the Civil War to end slavery. (And incidentally, I want reparations for their sacrifice, say 40 acres and a mule, but I digress.)

Dave and his critics agree debt is a bad thing and you should work double-hard to get out of it. Each college loan you took out is a chain of slavery indenturing your future earnings to the lender.

Stop it! If you don’t stop it, you’ll bury yourself alive in a box!

I recently read a Dave Ramsey FPU coordinator ask about snowball vs avalanche in a special case. Her client had just taken out a payday loan at an obscene interest rate. She wanted to know if maybe some of the smaller debts could wait. My first thought was, “Maybe this is a case where snowball isn’t as good as avalanche.” Everybody’s different, and when you have multiple debts it makes a difference whether you’ve got 10 little installment loans or 3 huge mortgages to pay off.

Hold it!

What am I thinking? A Payday loan? Payday loan! The client just took out a payday loan!!!

Just a freaking minute. Avalanche vs Snowball is the wrong question. The client seriously needs an attitude adjustment. What’s she doing taking out a payday loan?

Stop it!

It won’t make a difference between paying off debt via Avalanche or Snowball if you take on any new debt. STOP IT! YOU’RE BURYING YOURSELF ALIVE IN A BOX!

Dave Ramsey and his harshest critics agree: STOP IT!

You can’t get out of a hole by digging deeper.

Instead you must “Mind The Gap.” Mind the gap between what comes in and what goes out.

Consider a reverse analogy. What happens when you move little and eat much? A calories gap forms. Those calories accumulate and one gets fat. Conversely, suppose you both embrace hunger and start exercising like a madman. A body could lose a hundred pounds that way.

Consider the gap between income and expenses. What happens when more money goes out and less money comes in? Slavery. Also known as debt. And what is the very first prerequisite for saving? Or debt repayment? More money has to come in and less money goes out. We aren’t talking about balancing income and expenses, we’re talking about imbalancing them with more income than expenses.

Get your mind right.

Mind the Gap.

Less goes out.

More comes in.

Dave and his critics agree on this. The gap must be POSITIVE and as LARGE as you can make it.

Now we’re ready to cover this snowball versus avalanche thing.

Many moons ago, I got into rental real estate and I used “leverage” to buy houses. At the same time another leveraged real estate dude named Dave Ramsey was flying much higher than I. Then along came this thing called the S&L crisis and a credit crunch. I had used a relatively risky form of lending “land contracts” but the risk was mitigated by the fact my lenders could not call my loans.

This was the moment when I got religion and renounced leverage as evil. Dave Ramsey was unknown to me, but his mentor Larry Burkett dealt a mortal blow to my belief in leverage. I had a chance that was denied Mr. Ramsey: to work my way out of debt. I had three mortgages to pay off and I didn’t have Mr. Ramsey telling me to do the snowball.

Instead, I rather by accident discovered the debt avalanche model. Here’s how it worked:

I went to work paying off the highest interest rate mortgage fastest. I chose this one because it would save me the most interest expense. After a couple years I repaid this loan early and I went on to the second-highest interest rate mortgage early. When this was repaid, I attacked the last mortgage with the lowest interest rate.

This worked so well that it made me a believer in the avalanche method. I am living proof that it works.

The snowball method says that instead of going highest interest rate first, pay off the smallest debt first. Then second-smallest, etc.

Here’s another fact in play: My highest interest rate was for my smallest mortgage principal and my lowest interest rate was for my largest principal amount. Oh. That means that in my case there was no difference between the avalanche and snowball methods.

The avalanche and snowball methods coincided. This may well be common with no difference between the two methods.

But wait. There’s more. All these were multi-decade mortgages. I forget their exact terms.

When I went to work on repaying the first mortgage it took blood, sweat, and tears. I got tough on my expenses, saved a lot, and made the extra payments. After a few years I paid it off early. The next mortgage was easier and faster because I could now apply BOTH mortgage payments to the next debt. When you start putting together multiple mortgage payments on a debt, its principal goes down awefully fast.

When you make advance principal payments you dramatically shorten the terms of your loan. With a shortened term, the amount of interest that you pay dramatically decreases. Now this is important: When the term is foreshortened like this, the cost difference of the interest rates becomes less important.

OK, Dave Ramsey’s math is suboptimal. But it is not a lot of money.

Dave Ramsey is a behaviorist. He is more interested in people’s behavior than in the numbers. Bad behavior gets you into a debt hole. People with amazing savings rates never call his radio program. Most of the peope he advises are deep in debt.

Many of the people he advises have bad fiscal habits. It’s hard to cope with bill collectors calling at all hours. Dodging process servers is no way to live. When a spend-aholic starts budgeting and working out of debt, it’s easy to get discouraged or encounter financial misfortune.

Let’s suppose you’ve got ten debts and you lose your job. You can’t make this month’s payment. You have to ask your creditors for mercy. Now which of those creditors are going to be most flexible? The one to whom you owe a hundred bucks or the one you owe ten thousand bucks?

Suppose you’re not quite sure about this anti-debt sermon that Larry Burkett, Dave Ramsey and I are preaching. Following this advice won’t feel good at first. But it’ll beel great after you start doubling–or tripling–up on payments.

For this reason us sermonizers want you to get some of that joy before you give up.

Ergo I’ve changed my mind about the debt avalanche versus the debt snowball. The snowball math isn’t optimal, but it is rarely so sub-optimal that it matters. The Proverb says “hope deferred makes the heart sick” and this argues in favor of the snowball over the avalanche.

Steve Poling

Masters degrees in math and computer science. Poet in several computer languages. I write stories about Sherlock Holmes' brother Mycroft, steampunk, and SF.

Grand Rapids, Michigan