And now we are to the meat of the plan. Baby Step Two is the Debt Snowball.

When paying off debt, there are many different ways to prioritize your debts: smallest to largest balance, smallest to largest minimum payment, largest to smallest interest rate, and so on.

The Debt Snowball is Dave’s preferred method for debt repayment. The debt snowball orders the debts from smallest balance to largest and pays them off in that order. Mathematically that doesn’t make a whole lot of sense. You know that. I know that. Dave knows that. The thing is, however, Dave has been doing this for decades. I think that we can trust his judgement on this. But, if you really want to know why he chose the mathematically inferior snowball method, it has to do with psychology more than math. By placing your smallest debts at the top of the list and paying them off first, you build psychological momentum which carries through the rest of your debt.

The Debt Avalanche is where you place your debts in order by interest rate with the higher interest debts at the top of your list. If you’re a nerd and just cannot follow the debt snowball method due to the math, the debt avalanche is your plan.

A variation of the debt snowball, called the Dead On Last Payment (DOLP) Snowball, uses a payment to balance ratio to order the debts. The P/B Ratio is the Balance Due divided by the Minimum Payment. You then order your debts by ratio from lowest to highest. In essence, this balances the snowball and avalanche methods as debts with higher interest rates will tend to have higher minimum payments and, therefore, a lower P/B Ratio.

For example, let’s look at a $5,000 loan at 6% and 12%.

6.00% – Minimum payment = $96.66. P/B Ratio = $5,000 / $96.66 = 51.7.
12.00%  – Minimum payment = $111.22. P/B Ratio = $5,000 / $111.22 = 45.0.

You can see that using the DOLP Snowball method will tend to favor paying off higher rate, smaller balance loans.

So, if you are truly unable to follow the plan laid out by Dave and the Debt Snowball, the DOLP Snowball should provide an acceptable alternative.