Want to beat debt? Forget logic

debt struggle bills©iStock.com/Fertnig

FORGET interest rates, some personal finance experts say, start with your smallest debt and keep going.

It's called the snowball method and, this month, the Journal of Marketing Research has proof that it actually works.

Looking at data from a debt settlement company - a detailed history, spanning years, of how almost 6,000 people tried to get out of debt once and for all - researchers found a, "robust positive effect of subgoal completion on goal persistence."

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In other words, irrespective of the actual amount of debt or the interest costs, consumers that swiftly paid off several balances were more likely to ultimately become debt free.

Or, to put it another way, small steps beat debt.

Small steps beat debt

Let's take a closer look at some of these findings.

As we said above, the paper, called Can Small Victories Help Win the War? (abstract here) has the surprisingly rare virtue of actually having access to data about specific individuals' debts.

The random sample of 5,493 clients came from an American debt management company called Freedom Financial Network. They'd all been clients for at least five years.

Dollar ratio or number ratio?

Again, as we said above, a really interesting finding of this research was that, when it comes to predicting whether a person will get debt free, the number of debts repaid is a better indicator than the actual amount of debt.

Looking at the 2609 clients actively paying down debt one year after they started with Freedom, the researchers found that, "the probability of success does not increase when a greater dollar percentage of debt is paid off."

However, the number ratio - the percentage of debts the client had repaid by that point - was positively correlated with future success.

In fact, clients who consistently paid down their smallest balance first were 14% more likely to complete the program than those who paid down balances in no specific order.

Getting started

Another interesting finding was that not having a small goal was highly correlated with not even starting repayment.

In other words, those unable to repay a small balance were much more likely to drop out altogether.

Remember, the researchers were looking at a hugely varied group of people in debt but they all had one thing in common: they'd taken the first step by coming for help and being enrolled in a repayment programme.

With this in mind it's a bit shocking that 30% of the same, over 1,500 people, left before the debt settlement firm had negotiated even one debt on their behalf.

Clearly, what some other psychologists have termed, "the starting problem" of breaking into a large, daunting task really is problematic.

Overall, just 43.2% of clients successfully got debt free.

More than meets the eye?

This research appears to show, or at least lend support to, what has been a mantra among some money experts for some time now: it's motivation, not money, that matters.

Their view runs counter to the traditional advice for those with multiple debts: pay down the highest interest rate first.

The traditional advice, if it's followed until all debts are paid off, is undoubtedly the cheapest option.

Snowball-advocates say and this research seems to suggest, however, that sometimes motivational fist pumping beats logic.

However, there may well be more than meets the eye here.

For one thing, the snowball method has a certain niche.

The researchers don't look into it, but the kind of people that are consciously using this method to become debt free might be more likely than the general population to have the support of an online or real world community.

In particular, because this is an American study, they may well be following one proponent of the snowball method in particular: Dave Ramsey.

Ramsey has a radio show, a personal finance call in with over 8.5 million listeners a year, and a series of books, videos, weekly clubs and stadium shows that take beating debt to the level of evangelism (if you think we're kidding, view below).

How do you measure faith and daily pep talks as part of debt repayment motivation?

It's also worth noting that this study, although it has a very strong data set, is at odds with many other studies into motivation.

Research into exercise from 2006, for example, showed that completing a subgoal often weakened the probability that an individual would reach an overarching goal.

Looking at participants whose goal was 'get fit' researchers found that completing one of the goals - to exercise more - made participants less likely to complete another - eating healthily.

Many other studies have come to the same conclusion, that making big lifestyle changes in order to achieve goals is a tricky business with a high rate of failure, by different means.

Like dieting, getting out of debt certainly requires big lifestyle changes.

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