By Felicity Anderson

Paying off your smallest debts first using the ‘snowball method,’ is the best way to clear your borrowing, according to research from Harvard Business Review.

Instilling borrowers with a powerful sense of accomplishment, this method is key to paving the way for further repayments, reports this week’s Independent.

Based on a series of experiments that simulated participants repaying virtual debts, researchers discovered that the percentage of the balance that participants cleared made the biggest impact on how hard they worked.

Factors found to be less important for success was the amount that the participants repaid and how much money was left in their account after clearing their virtual debts.

“Powerful effect on people’s sense of progress”

The snowball method is at odds with conventional debt repayment advice that recommends repaying debts with the highest interest rate first, whatever the balance.

While the traditional advice is arguably more mathematically sound, researchers found that the snowball method was more motivating for participants, who reported positive effects after seeing an initial debt totally disappear.

Remi Trudel, one of the HBR researchers, explains:

“Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debts.”

The snowball method in action

Snowball method most effective way to clear debt according to researchers

The Independent notes the success of US-based personal finance blogger Derek Sall, who used the snowball method to pay off around $100,000 worth of debt, including his mortgage.

On his blog, Life and my Finances, Sal shares his experiences of becoming debt free and provides a free spreadsheet that borrowers hoping to follow in his financial footsteps can download.

Here they can enter details of their debts beginning with the smallest one first, including interest rates and minimum payments.

After entering the amounts that they plan to repay, made up of an initial lump sum, followed by regular monthly repayments, the spreadsheet cleverly calculates how many months it will take for them clear all of their debts, by focusing on one debt at a time.

Sall writes on his blog:

 “I suggest that people pay off their debts from smallest to largest and ignore the interest rates entirely,”

“Sure, that 18 percent credit card debt might freak you out like crazy. But if you tackle the smaller debts with intensity like I know you want to, you’ll get to it sooner than you think – and then bust it out sooner than you ever thought possible!”

The snowball method

After you’ve calculated out how long it will take you to reach financial freedom, Sall recommends manipulating the numbers and exploring ways to accelerate your journey to becoming debt free,

Suggestions he provides on his blog include boosting your income, for example by supplementing your main income with a part-time job, or reducing your spending through selling unwanted possessions.

“The faster you tackle your debt snowball, the more likely it is that you’ll get finally get out of debt!” he says.