The OTHER reason to use the Debt Snowball

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People are always debating which method of paying off debt is better.  The Avalanche method (aka highest interest rates first) is mathematically superior and will cause you to pay the least amount of interest.  The Snowball method (aka smallest balance first) is said to give you the “small wins” you need to actually stay dedicated enough to pay off all your debt.  Being an engineer, I have always been drawn to the math and am a spreadsheet nerd, but I chose to use the snowball method.

Those “small wins” was not something I felt was important for myself, I was fed up with debt and ready to be done with it!  I don’t believe one way or the other would have slowed me down (even though the statistics on the number of people who get out of debt disagree).  Instead, I believe there’s a more important reason that is rarely ever discussed or mentioned as a reason for using the snowball method.

I spent a lot of years while not making money trying to lower my set monthly expenses and this is something the snowball method does.  The more debts I pay off, the lower my set monthly costs become.  The lower I can get my set monthly costs, the less I have to make each month if things went bad.  In 2001 we had 9/11 and the dot.com crash and then in 2008 we had another fallout of the economy.  When the going is good, everyone is happy, but when things turn bad, a lot of people get hurt.  Believing that it won’t or can’t happen again is sticking your head in the sand.  Choosing the snowball method is a hedge against the bad things that can occur in life that you don’t expect.

Whether it’s your industry or company having troubles (look at the oil and gas industry right now), a medical issue that prevents you from working or making as much as you used to, or a natural disaster that devastates your local economy for a while (Katrina? Sandy? Colorado or Texas floods? etc).  If you’ve spent the last 6-12 months paying on your highest interest rate/highest balance debts, you might have saved on interest, but you still have the same exposure and requirements for income.  I knew that each time I knocked a debt out I became a little more secure and wouldn’t need to make as much money each month if something bad happened.  Whether it was disability insurance, unemployment, or a minimum wage job… whatever the situation, lower monthly expenses is a good thing.

I will admit that my personal situation was that when I finally got motivated, I didn’t have any interest rates above 5.25% with my lowest one being 3.625%.  So, there wasn’t a huge variation in how long it would take or how much interest I would pay, even though it was going to take me and estimated 7 years at the time (based on no raises).  The difference was going to be equivalent to less than $3k over that time frame and the difference of two months of being in debt.  But, considering it was over 7 years, that notion of minimizing my expense was a high priority.

Had I been saddled with some 29% credit card interest rates on debts that might not have aligned as the smallest (thanks Capital One… I still hate you), I might have chose to eliminate them first instead of 4th or 5th out of 7 debts.  If they were the absolute largest, I might bump them up a few slots in the order, but I’m not going to try to pay off $30k debts when I have a couple $2-5k ones sitting around that could be dealt with quickly and lower my risk of exposure to life gone bad.

 

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