Additional Research Shows the Snowball Method Is the Best Debt Payment Strategy

It is logical to first pay off the debts at the highest interest rate . However, research shows that paying off a smaller balance is actually more efficient. This is a good reminder that achieving financial progress is not only about logic, but also about behavior.

In the Harvard Business Review, researcher Remy Trudel discusses her recent research published in the Journal of Consumer Research . Using anonymous financial data from 36 months, Trudel and his team studied how 6,000 debtors paid off their balances. First, they found that prioritizing one debt over another was effective:

We found that consumers who focused payments on one of their multiple accounts paid off more card debt than those who split payments evenly across multiple accounts.

Based on this data, they then conducted their own research to explore various debt repayment strategies and methods. In one experiment, subjects either paid off a debt using an equal payment method or focused on one at a time. Their findings confirmed the data:

Participants who were assigned a concentrated repayment strategy worked harder than those who scattered their repayments by speaking more words and paying off their debt 15% faster.

They ultimately found that the reason this method worked so well had to do with the power of the small wins . Trudel explained (emphasis added):

… it is not the size of the payout or how little is left on the card after payment has the greatest impact on people’s perception of progress; rather, it is how much of the balance they manage to pay off. Thus, focusing on paying off the lowest balance tends to have the strongest impact on people’s sense of progress and thus on their motivation to keep paying off their debts.

In the world of personal finance, this is called the snowball method . Their research corroborates other evidence (such as this study by Northwestern University’s Kellogg School of Management ) that snowballing is the most effective debt repayment strategy. Again, personal finance has a lot to do with psychology, so while mathematically it would be more logical to focus on the debt with the highest interest rates, in practice it makes more sense to focus on small wins.

However, even Trudel adds the caveat that this method makes more sense, “since there are similar interest rates in consumer debt accounts.” If you have debt with a slightly higher balance but significantly higher interest rates, it probably makes sense to focus on it. You will still get a small win, but you will save on interest. And this is an important point – you don’t want to throw all the logic out the window, you just want to make sure that you are working with your thinking and not against it.

To learn more about the study, follow the links below.

Payback Concentration and Consumer Motivation to Get Out of Debt | Consumer Research Journal via HBR

Photo by John Lodder.


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