The Debt Snowball Demystified

A 2016 study from the Harvard Business Review gives new credence to a time-tested idea—the power of small wins to help people get out of debt.

Among financial advisors, there’s been a debate raging for years about the most effective approach to paying off debt. The argument comes down to math versus emotion. Do people get better results by first concentrating on the debts with the highest interest rates, thus paying less interest over time? Or is it smarter to list debts smallest to largest and feel the growing satisfaction that comes from knocking out one small debt at a time?

Those who think interest rates should guide how people reduce debt argue that the math proves them right. After all, the longer you put off paying down a high-interest debt, the more interest payments it can rack up. That can make ordering your payments in terms of highest to lowest interest rates seem like the obvious best method for reducing debt the fastest. But many people have found that they get out of debt faster and feel more hopeful about their finances when they can pay off a couple of smaller debts right out of the gate.

The Debt Snowball Method


The strategy of paying only one debt at a time and progressively applying more cash to the next largest debt is sometimes called the debt snowball method. It’s a simple mental image comparing the debt reduction process to the action of building a snowball and watching it grow as it rolls downhill. The snowball might not look that big or impressive at the start. But with every foot of progress, it gets bigger and faster. And the downhill momentum applies just as much when people pay debts down from smallest to largest.

The new Harvard research confirms that the debt snowball method is more likely to motivate people to reduce debt than the interest rate method. Studying the repayment activity of nearly 6,000 people who had multiple debts, the authors found that people who focused their repayments on one account at a time eliminated more of their debt than the set who sent equal repayments across multiple accounts.

Concentration, Small Wins and Freedom


Convinced that there must be a link between strategy and progress with debt, the authors formed a few hypotheses about what was causing the one-at-a-time group to pay off more debt than those who worked on everything at once. Separate experiments tracked over three years led the researchers to three key insights.

  • Divided focus diminishes effort. In the first experiment, participants were given two strategies for debt repayment and a word game in which they could earn money for their repayment efforts. Everyone began the experiment with an equal amount of debt divided into five accounts. One group was assigned to pay off all the accounts with equal simultaneous payments, while the other was told to work on one at a time. The participants who concentrated repayments on one debt at a time, a crucial part of the debt snowball method, had higher productivity in the word game than their peers who were trying to pay down several accounts at once. As a result, the one-at-a-time group repaid their debt 15% faster than the others.

  • Clear progress increases motivation. The second hypothesis was that working on only one debt at a time inspires harder work and quicker progress on debt because people could easily see how much progress they were making. The results showed that the one-at-a-time group perceived “greater progress toward their goal of getting out of debt” and agreed that addressing a single debt at a time boosted their motivation.

  • Motivation is the best asset. The researchers concluded that neither the original size of the debt someone is working on nor how big it remains after each payment makes was indicative of how long it would take participants to pay off their debts. Instead, the greatest factor in paying off the debt quickly was the motivation provided by visible progress a person saw in the quest to pay debt off.

The Power of the Debt Snowball Method


Because finance is personal and not strictly mathematical, the question of motivation plays a huge role in whether or not someone is successful in getting out of debt. That’s why the Harvard study concluded that feeling like you’re winning is more important than making sure you’re eliminating the account with the highest interest rate.

Starting with the smallest debt is the smartest strategy because it provides a powerful opportunity to get an early win. And when you’re trying to get out of debt, you need that fuel to stay motivated and keep going until you’re debt-free.

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