I’ve heard lots of different theories and recommendations when it comes to paying off debt. Why do you advise paying off debts from smallest to largest?
A lot of people wonder the same thing when I bring up the debt snowball. Some think paying off the debt with highest interest rate first is the best approach. This may seem to make sense mathematically, but I realized a long time ago debt is not a mathematics problem—it’s a behavior problem. Personal finance is 80 percent behavior, and only 20 percent head knowledge. Besides, if all those people were so great at math, they wouldn’t be up to their eyeballs in debt in the first place!
The reason the debt snowball pays off debt from smallest to largest is that modifying your behavior and providing inspiration to get out of debt is more important than the math. Your probability of becoming wealthy is more closely connected to your behavior than your financial “sophistication” or academic pedigree.
When you pay off a small debt you experience success, and that gives you hope. Then, you move on the next debt. When you pay that one off, and you’ve wiped out two debts, it really energizes you. At that point you start to get excited, and you begin to believe in yourself and in the fact you’re actually on the road to becoming debt-free!
Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.