Snowballing your debts — paying them smallest to largest regardless of finance charges — might not make sense mathematically, but it just might work better, according to a new academic study.
Perhaps proving that personal finance is more personal than finance, researchers who study consumer behavior found that “small victories” consumers feel after quickly wiping out small debts provide encouragement to pay others.
“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,” write the authors, Alexander L. Brown and Joanna N. Lahey of Texas A&M University, in a paper to be published in the Journal of Marketing Research.
That’s counter to the usual advice to pay debts from highest interest rate to lowest, with the goal of paying less interest.
The new study adds to recent research that examines the merit of snowballing debts, paying minimums on debts to avoid late charges and allocating extra money to the smallest debt first to eliminate it quickly. Then you apply money you would have been paying on the first debt to the next-larger account, always putting more money toward the next-larger debt — a rolling snowball effect.
Baked into the theory, and confirmed by other studies, is the benefit of the atta-boy or atta-girl feeling with each debt account retired.
The debt snowball concept is not new and has been popularized by get-out-of-debt guru Dave Ramsey, a radio personality and author of the best-selling book “The Total Money Makeover.”
“When you start the Debt Snowball and in the first few days pay off a couple of little debts, trust me, it lights your fire,” writes Ramsey in “The Total Money Makeover.” “When you pay off a nagging $52 medical bill or that $122 cell-phone bill from eight months ago, your life is not changed that much mathematically yet. You have however, begun a process that works, and you have seen it work, and you will keep doing it because you will be fired up about the fact that it works.”
But is that really true, wondered Brown, the Texas A&M behavioral economist, as he read Ramsey’s book. Does the mere act of completing a task trigger motivation?
The concept seems to be used by addictive video games. They make beginning play easier, which gives players quick wins before the game gets more and more complex, holding the player’s attention.
Brown thought of his own experience training for a half-marathon for the first time. “I ran 4 miles, and I thought, ‘Wow, I didn’t know I could do that.’” He seemed to derive motivation after completing the run.
In academia, there are conflicting theories on how motivation works, Brown said. Pre-goal motivation refers to getting excited and accelerating efforts as you near your goal. The new study considers post-goal motivation. Now that you completed a subgoal, are you encouraged to attempt more, en route to completing the larger end goal?
If so, the findings could have ramifications beyond debt repayment, into weight loss, completing projects at work or any goal that could be broken into subgoals of varying sizes.
In the lab, Brown and his colleague began testing the theory by having test subjects perform a tedious task, retyping 10-character strings into a Microsoft Excel workbook. Strings were divided over five columns where the length of the columns was ascending, descending or even. Completing a column was akin to completing a task.
Results were clear. People complete a tedious goal faster when it is broken into parts arranged in ascending order. Indeed, test subjects increased productivity 13 percent by doing it that way, researchers found.
In other words, quick wins fuel motivation.
While other studies have suggested the debt snowball works, the new one suggests how and why it might work, Brown said.
Alas, in the real world, the debt snowball concept isn’t a panacea. When you apply finance charges of varying amounts to those debts, the picture muddies.
“There are some interest-rate differences where that will work, and there are some where it won’t,” Brown said.
The snowball motivation works when there’s little difference between interest rates, a few percentage points, but motivational benefits likely won’t overcome large interest-rate gaps. For example, it would be difficult to justify paying a smaller 5 percent debt before one that charges 29 percent, like a credit card owned by someone with poor credit, he said.
And your ultimate goal with debt elimination matters too. Is success getting out of debt quickly or paying the least interest? The snowball works best when speed is the top priority, Brown said.