One of the big debt reduction debates has always been math versus psychology. How much debt you have has more to do with human behavior and psychology than it does with mathematics. People are, for the most part, smart enough to realize the math behind debt. They know that if you charge more than you can pay off, you’ll be in debt.
The same is true for repaying that debt. There are two schools of thought when it comes to repaying debt. You can take the mathematical approach and pay off your highest interest rate debt first, thus reducing your total interest payment. This is commonly referred to as a debt avalanche, a reference to the other, Dave Ramsey method called a debt snowball. A debt snowball is where you pay the smallest debt amount first, then roll that payment into the next smallest debt amount. Your payment grows and grows, your debts are knocked off as quickly as possible, and this provides a psychological boost to help you finish. It’s clearly not optimal, no one disputes that, but it works off psychology and it has worked for a lot of people.
Here’s the key question – how much does the debt snowball cost you over the traditional method? As much debt as we may have, chances are no one goes through the effort of calculating it. We simply pick the one we think is best, either math (avalanche) or psychology (snowball), and we run with it.
What if there was a tool that did this? I found unbury.me, written by Jordan Santell (@jsantell), a calculator that calculates all that for you. If you enter in your debts, your payments, and how much you have to pay each month – it spits out the difference you’ll pay in interest. No more guessing, this is concrete data.
I put in some dummy data just to see how it worked. Two loans:
- $300 to pay each month
- $5000 – 6% interest – $50 minimum payment
- $6000 – 8% interest – $75 minimum payment
With the avalanche, I’d be debt free by December 2014 having paid $1343.92 in interest. With the snowball, I’d be debt free by December 2014 having paid $1519.60 in interest. Going with the snowball, and it’s psychological boosts, would cost me $175.68. Is it worth it? Maybe, but at least now I can decide knowing it was going to cost me $175.68, rather than “more.”
And the calculator is really pretty.