Yes, in his course he explicitly explains this strategy is in deference to human psychology. Even if paying towards highest interest debts is mathematically optimal, better to have a strategy you are likely to stick with, than a theoretically better strategy you are more likely to eventually abandon.

I've found this train of thought has applications in maintaining an exercise routine as well. It was more about finding a routine that I'd actually stick to than one that was optimal for fastest/best gains, which was my original (failed) strategy.

That does sound rational though, by paying off the small debts you reduce the amount of information you have to comprehend. It may not be ideal financial advice, but it will make the remaining debt easier to manage on an emotional level. You also get the peace of mind that those smaller problems will now not spiral into larger problems. You are free to focus on a resolution to the problem.

We had a few small debts (2 student loans, credit card, car payment) and when a friend explained the debt snowball concept it was definitely the key factor in us paying off our debts faster. For me it felt like I was back in control because I actully had a plan that made sense and seemed actually doable.

And I think this is the key. Debt is a weight on people and it wears them down. You need to build that person back up even if that means not taking the absolute most efficient means to pay off the total debt.

I'm following the snowball method now. The reason I like it is that I free up money faster. If I have $4000 on a credit card and the minimum is $100 a month. If I pay that smaller balance off quicker I free up that $100 a month to be used towards the next debt.

I think you hit the nail on the head. My wife and I are using the debt snowball method and I just payed off one of our debts in full yesterday.

It may not have been the largest debt or the one with the highest interest rate but it's one thing I don't have to worry about now. It's one fewer company I have to deal with monthly. It instills a sense of hope that "we can do this!" that I'm hoping will bolster our budgeting and help us tackle the larger debts.

While I agree in that it obviously is not the smartest way of doing that, if it gets people to actually feel like they have a plan for taking care of their debt and to start making progress on doing so, then it's worth it.

Obviously they probably shouldn't have bought a bunch of things they didn't need, but hindsight's always 20/20.

This whole idea that "oh you have multiple creditors obviously you've made bad decisions" is misguided and naive in the extreme.

People have medical bills. People need the counsel of attorneys. You generally need a reliable car to get to work and a roof over your head. You can have huge mountains of debt and be forced to dig your way out by the skin of your teeth through no fault of your own.

Paying hundreds a month in credit card interest is not reserved for shopaholics.

Those are all valid reasons and of course it's understandable that you'd need to resort to using credit card debt if you had no other option.

However, had they been more frugal and put more effort into their savings prior to the event, they might not have needed to go into (as much) debt.

If you need an attorney and don't have thousands of dollars in the bank, of course you'll need to use a credit card.

Attorneys aren't banks, it's not unreasonable for them to refuse to finance your counsel.

Yeah, they should use payday loans instead!

Seriously though, it is astonishing to me how many people are so entitled they just literally cannot understand why someone would have legitimate problems with money.

Not everyone is lucky enough to make a break out of poverty, nor is everyone born in middle class income or above. And yes, breaking out of poverty requires some luck in addition to hard work and determination.

I'm a pretty stupid spender. From personal experience, I find the snowball method is satisfying when, for example, you have 3 maxed-out high-interest CC's and 1 has a low max and probably the lowest of the interest rates (a difference of maybe 3%). But if there's a huge difference in interest rates, with the right numbers in your face, it's pretty easy to see how wasteful it can be. When I'm in payoff mode, I usually roll everything up in a spreadsheet and focus only on watching the total debt drop while paying the min on everything but the highest interest. A few other numbers I like to look at are lower % used credit and higher available credit, all the same numbers really, but it's satisfying to watch them all change, so I put them in the sheet. Obviously I can't completely hide the real numbers from myself, I keep them in a different tab.

Another mental factor I don't see mentioned often is the availability of the credit you payoff. If I put $1000 towards a CC that money is easily available if I need it. If I put $1000 towards one of those cards that can only be used for dental work, which are often the kind that have the highest interest rates, then that money is pretty much gone.

If you can't handle LoC/CC (and you obviously can't if you've collected so many debts that you struggle to manage them), it makes sense to pay off and close small ones. Because the risk you will run up those lines is worse than the sub-optimally paying off total debt.

I.e. For many, five loans with $1000 avail credit will become $5000 more debt. Better to make that four (or three, or one) loan, even if remaining loans have higher interest rate.

I have literally have people tell me that this is still rationality because it's the rational thing "for them". Like, the weirdest one was a cognitive psychology doctoral student.

I mean, okay, if you can redefine rationality to be completely subjective, then sure, rationality is flargikriggendurf.

You're conflating rational and optimal. It is rational and optimal to pay off the highest rate debt first. It is rational and suboptimal to pay off the lowest debts first if you know you'll achieve success through this route. When presented with a $100k debt at 6% interest plus several $5k debts at 1-5% interest, the number of debts and the size of the large debt are overwhelming, psychologically, and people stop behaving rationally (and therefore also behave sub-optimally). The snowball method gets them to act more rationally (paying off their debts successfully), but still sub-optimally. It's closer to optimal, less debt, than the path of not paying.

EDIT: This is similar to any other sort of debt that people find themselves in. I weighed 220lbs, couldn't bench 100lbs (maybe 2 reps), and could barely run 1/4 mile at a 12-minute mile pace before wanting to pass out. So I was in a health/fitness-debt. Optimally, I could've set aside 2 hours a day to some combination of aerobic and strength training to achieve my goals in a short period of time. But that required a massive change of habits that was unlikely to stick. Instead, I ran 3 days a week (well, walk/ran at the start), learned to set aside my time for fitness activities, and improved my cardio. As I managed my time more effectively, I added in other fitness activities that got me to my strength goals as well. Adding it all at once would have (for me) been overwhelming and I likely would have failed (again) to make a routine of it. Adding in each part piece-by-piece was the far better strategy, and entirely rational, bypassing the normal anxieties of my mind by making the large change occur over several smaller changes.

It is rational to realize human psychology is empirically real and take it into account, including our own. If anything, perhaps we should be even more skeptical of our own reasoning when we believe we are being purely objective and free of bias.

Optimizing the likelihood of consistently following through with a plan is very rational.

In addition to the other fine replies, let me point out that "humans are irrational" is the negation of a very small point. It allows us to think we know something, when in fact what that statement tells us is only that we don't know something about human behavior. It is logically much like saying "Humans are not 7-year-old bulldogs named Fido living in New Jersey on the second floor of a shared house." It's a true statement, but carries virtually no information because it only identifies an incredible small, precise part of the possibility space and negates it; it does not, on it's own, tell you much about what humans are.

Humans are not merely "irrational", they positively behave and think in very specific ways. No human is immune to this. It is, therefore, perfectly rational to discuss rational ways of managing the specific human behaviors that lead to irrational behaviors.

This is also while ritual denunciations of "homo economicus" are really quite sophomoric... the nonexistence of rational economic actors does not mean that you can simply model humans in whatever way you please to make your preconceived notions work. It means that you've got to go learn what humans actually do, which is going to be very challenging, and take that into account, which is almost certainly going to shock anyone who tries it. It means the problem is suddenly immensely harder, not easier.

>This is also while ritual denunciations of "homo economicus" are really quite sophomoric...

Admittedly, this is because "homo economicus" is sophomoric in the first place: it proposes an actor who has no computational or informational bounds and sees the world only in terms of a single real-valued variable called "utility", which is generally constrained only to be any monotonic, continuous function of their monetary net worth. This actor then optimizes expected utility with no regards to modeling causal structure or to which observables are actually ergodic.

No such creature ever has, or in fact ever can, exist in the real world. In limited domains where ergodicity holds, computational needs are few, and small sample sizes can yield very good inferences, we can do thought experiments about what such a creature would do, and act according to those if we please. But holding that such behavior is the normatively correct way to act when it's actually impossible is the kind of religious thinking one gets when composing "normative theories" without experimental basis.

Isn't it rational to use the strategy you know you will follow?

Logic depends on a subjective choice of axioms, and an unstated one is "a plan that motivates permanent improvment is better than a temporary one".

Rationality is about which objective function you want to optimize. If it's money, then the snowball is not rational. If something else bothers you more, it might be.

To be more mathy:

Option A (snowball): Total Cost if successful: $X Likelihood of success: 90% (just making stuff up here)

Option B : Total Cost if successful: $Y Likelihood of success: 80% (again, making stuff up)

If 80% * Y + cost of failure > 90% * X plus cost of failure, even if X > Y, then a rational actor will choose Option A.

Sure, the "chance of success" is subjective, but ignoring it doesn't make the likelihood of failure go away.

I have also read and successfully applied Dave Ramsey's debt snowball method (suboptimal yet effective). While I was reading the article, it confirmed to me that Dave Ramsey's method falls in line with a large portion of the general public's tendencies. No wonder he is so successful, he has a large market already psychologically primed to believe and apply his method.

It also reduces risk in the form of default, higher fees from late payments, increased interest rates from missed payments, and provides a buffer for unexpected expenses down the road.

Finance is very situational and when people talk about things in absolutes like the articles does, it can mislead people who have different circumstances, goals, proclivities, and risk profiles.

I've used this strategy, and it's pretty awesome if you have a lot of smaller debts that snowball pretty quickly.