We’ve covered the Debt Snowball Method and the Avalanche Method. In that same post, I also briefly touched on Suze Orman’s whacky 20% method of taking 20% of your total debt load and paying that much extra on the first debt you’re paying off – a method that is only better than just paying the minimal payment. Today, however, I’m going to spin some commentary on what You Need A Budget recommends. Because I thought it was very interesting, though not necessarily in a good way.
Because everyone feels like they have to reinvent the wheel, YNAB has a debt paydown method called “The Alphabet Method” where you list your debts alphabetically and pay them down that way. I don’t really get the logistics of it, but whatever.
The YNAB’s team reasoning behind this “revolutionary” idea, is that we learn how to read by learning the alphabet. So they think the easiest way to pay off debt is alphabetically. Keep in mind, the five largest issuers of credit are Citi Bank, Chase, Bank of America, Capital One, and American Express (which only narrowly beats out Discover). Most people aren’t going to get very far in the alphabet.
I appreciate them ignoring interest rates, and I do see how going down the alphabet would give people a sense of accomplishment. But what if the first debt on the list is $15,000 owed to Bank of America? They have to pay off $15k before they can move on to say, Barclays, which might be $3500. The time it would take to pay down the alphabet in that scenario!!
I understand it’s simple. But so is the Debt Snowball. In fact, that might actually be the most simple, since it would only require you to login and see what you owe. You wouldn’t have to track down the interest rate or alphabetize it or take a percentage of anything. The second easiest would probably be the stupid Avalanche, but I would put this Alphabet Method ahead of the Avalanche and definitely light years ahead of that percentage thing though.
The reason I would put it ahead of the Avalanche is because I see more value and ticking off your debts alphabetically than I do by interest rate. There probably isn’t much value in it, but that’s how low an opinion I have of the Avalanche. Especially considering the fact that with the average person, their interest rates don’t even vary that much. Once one creditor gives you 18%, the rest are most likely going to follow suit with a similar number. And when I think about it, ticking off your debts alphabetically does have a satisfying ring to it. Way more satisfying than, “well, my 20% interest rate debt is gone. Now onto the the 19% one.” 😐
In all honestly, I feel like the Alphabet thing has more flaws than merit. There is no way I’m going to take a year to pay off my first debt because of how high it might be when I could get it paid off in 3 months with the Snowball Method. Balances matter. But there might be someone out there whose balances are all similar. Let’s say, $6000, $5700, $6325, and $775. In that case, if they want to do an Alphabet method, it’s not going to make that big of a difference in the total time they spend digging themselves out of debt.
Whatever will motivate people. Because behavior is the biggest obstacle to tackle when it comes to personal finance. 🙂