Quick Answer: The debt snowball method works better when paying smallest debts first rather than largest debts or highest interest rates. Research by Alexander Brown and Joanna Lacey found people complete tasks faster when arranged from smallest to largest, providing psychological momentum that helps maintain motivation throughout the debt repayment journey — though momentum only pays off if the plan can actually finish, and before I committed years to any snowball I’d run the numbers on bankruptcy, because those years of payments cost retirement savings that bankruptcy doesn’t.
I love it when smart college professors do research that helps to break incorrect assumptions. And that’s what Alexander Brown and Joanna Lacey did in their paper “Small Victories: Creating Intrinsic Motivation in Task Completion and Debt Repayment.”
Since 1994 I’ve been going on-and-on about the prevailing logic of the debt snowball or payment reduction effort to pay off your biggest debts (amount or interest rate) first. While that approach might make good mathematical sense, people are anything but logical. From my experience that’s a quick way to setup most people to fail. That is except for that subset of people who are logical, orderly, attentive to the smallest detail, and anal retentive. Not that anal retentive is a bad thing. And for the record, I’m not that guy.
People need more immediate feedback to pursue a difficult journey and behavioral economics has demonstrated time-and-time again why that is. But Brown and Lacey just hit it out of the park with debunking the prevailing logic of the debt snowball repayment method of focusing on larger first.
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What they found after applying data and math was that “when a task is broken down into parts of unequal size, participants perform faster when the parts are arranged in ascending order (i.e., from smallest to largest) rather than descending order (i.e., from largest to smallest). The calibrated model is consistent with the directional predictions of each theory. However, when participants are given choice over orderings, they choose the ascending ordering least often.”
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Did you get that? People do better when focusing on eliminating their smallest debts first but rarely chose that way to arrange paying off their debts.
The researchers found, “The increased motivational benefits of small victories may make it beneficial to pay off debts from smallest to largest in some cases, ignoring interest rates.”
But like so much in dealing with debt, the vast majority of people have incorrect assumptions about how to best deal with it instead of factoring in behavior into the issue.
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