Debt Snowball

I have a big problem with the debt snowball idea. In a nutshell it is this:

If you are trying to get out of debt, start with your smallest debt and pay it off first.  Then your next biggest debt, etc.

The idea is that the mental benefit of making a debt go away is a greater advantage than the money savings of paying off your higher interest debt first.  While I can see this point, it seems like it is encouraging a lack of financial literacy.  People who are going to the debt counselors who are advocating the debt snowball are in financial trouble.  If they are in trouble with debt, they probably lack some of the basic financial literacy that they need to properly manage their finances. The debt snowball doesn’t fix the core problem of financial illiteracy. In fact it makes it worse because it encourages them to do things that are financially unwise.

If people can’t learn to get the same psychological “buzz” out of really saving money by choosing an optimal payoff strategy, I would question whether they have really learned anything about managing their finances. The only way I think it makes sense is if you decide that the people you are trying to educate aren’t smart enough to understand the benefits of an optimal strategy where you pay off higher interest debt first. Then maybe the debt snowball makes sense.

I got into an argument with some family members about this. They finally admitted that the debt snowball strategy is designed “for dumb people” but that they don’t like to refer to them as dumb because “that seems mean”.

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