You might have heard about the “snowball approach” that many people advocate when paying off debt. When using this approach, a person in debt takes all their bills and outstanding obligations and lays them out side by side, ordered from lowest to highest balance. The debtor then pays the minimum balance on each bill and then puts any surplus funds towards paying off the smallest one on the table. Once the smallest debt is paid, one can then keep moving up the line and gradually tackle larger and larger debts. The hope, of course, is that your debt payments will snowball – that you’ll start small but then gradually empower yourself to move up the debt ladder.
In theory, this is a great logistical and psychological way to approach debt. In reality, however, the snowball method ignores varying interest rates across different bills. After all, your largest bill may have the highest interest rate, meaning that you only stand to cost yourself money by putting it off and paying it last. The method also attempts to break debt into pieces, a move that works for some but may actually leave many people less motivated and less connected to the realities of their debt.
So what debt-reduction solution can counter the snowball method’s deficiencies while also providing motivation? While every situation is unique, debt consolidation is usually a worthwhile effort. Let’s break it down:
-Interest. While the snowball method ignores the importance of interest, debt consolidation usually reduces some individual interest rates by putting all bills on equal footing.
-Psychology. The snowball method gives people an incentive to start paying off debt since small debts are more manageable and less overwhelming. But after each individual debt is paid, the approach creates a natural break after which a person must then muster the motivation to advance to the next level. This can take the wind out of many debtors’ sails. The debt consolidation method, on the other hand, gives people an impetus to start paying (because they can take the easy first step to consolidate) and then it provides motivation to continue (because once you start paying there’s no natural break in the process during which one may stop).
-Perspective. Debt isn’t about individual bills; rather, it is one solitary burden that ultimately reflects money out of one’s pocket. While consumer debt and student loan debt may seem different when each is incurred, both ultimately amount to money lost and numbers on a balance sheet. While the snowball technique obscures this truth by creating different “kinds” of debt, the consolidation approach forces debtors to recognize, acknowledge, and tackle the burden in full. Someone who follows the snowball route may find themselves still incurring small credit card debts because those are easy to pay off. A disciple of consolidation, meanwhile, is more likely to use Green Dot prepaid debit cards and act more responsibly in all areas of personal spending.
These are the main ways in which the snowball method is deficient and where debt consolidation is usually preferable. While this is certainly not true for every person and every situation, it is worth keeping in mind the next time you try to make a plan to motivate and help yourself out of debt.