Dave Ramsey's debt Snow Ball Method - how good is it?

Dave Ramsey recommends using the Debt Snowball Method. 


That means to knock out the debts one by one starting with the smallest without worrying about the interest rates (unless there are two debts with similar payoffs, then you take the highest interest first). 

You are supposed to attack the smallest debt and keep paying the minimum payments on all other debts. After the first debt is payed off, you apply the additional payments to the next one. 

This method will definitely work - at some point you will pay off the debt if you stick with the payments. But is it the best method? 

The trade off will be some $ versus increased motivation. This would work best for people with multiple debts who start to lose overview and motivation and are about to give up. 

For anyone with enough motivation and who is less prone to panicking, it would make sense to go with the highest interest debt first. Since it is a trade of $ versus increased motivation, for those people the $ will be more useful than additional motivation. 


I made calculations to illustrate the difference between the two methods: the Snow Ball Method and the method where you pay the highest % debt first. 
I used multiple calculators. The calculations  are not extremely exact, but good enough to get the picture. 

Debts:
$1,000 at 4%
$10,000 at 10%
$20,000 at 18%
Minimum payments are approximately 2% of the loan (that is what the credit card companies are using for their minimum payment calculations).


Snow Ball Method

1. We start with the smallest debt, disregarding the interest rates. 

Starting with $1,000 at 4%. Minimum payment is $18.42 (approximately 2% of the loan). 
We apply extra payments of $100 per month. 
Total payed for this loan: $1,016.
Time it took to pay it off: 9 months. 


After 9 months, the first $1,000 loan is paid off. The extra payment of $100 can now be added as extra payment for the second loan of $10,000 at 10%. 

During those 9 months the minimum payments were still paid on the other two loans. 
After 9 months the $10,000 loan at 10% shrank to $8,997 and the payments plus interest amounted to $1,718 for that time.
The third loan of $20,000 and 18% shrank to $19,117 and the minimum payments plus interest were $3,528.

After 9 months the total paid for all loans is $6,262.

2. Now we start to add extra payments to the second loan which is now $8,997. 
We can add $118 of extra payments (extra payment of $100 for the first loan and the minimum monthly payment of the first loan of $18). 
The time to pay it off is 36 months. 
The total payment will be $10,347, including $1,350 in interest. 

During those 36 months the last $20,000 loan was still needing minimum payments and it shrunk now to $15,961. 
Now after 45 months (9 months for the first loan and 36 months for the second loan) the total payments are $16,154. 

3. Now  we start paying off the last loan, originally $20,000 at 18% which is now $15,961.
The extra payments are now $310. The time to pay it off is 28 months. 
The total amount paid in these 28 months is $19,580. 

Totals for the Snow Ball Method:
$1,000 loan: $1,016, 9 months
$10,000 loan: $1,717 and $10,347, additional 36 months
$20,000 loan: $3,528, $16,154 and $19,580, additional 28 months
Total payments: $52,342
Total time to pay off: 73 months or 6.08 years


Highest Interest First Method 

1. The highest interest loan will be paid off first. 

That is the $20,000 at 18%.
With $100, extra monthly payments it will take 58 months and the total payment is $30,032.

During those 58 months the other two loans required minimum payments. 

The smallest loan of $1,000: only $203 are left to pay and $913 were payed in total.
The second loan of $10,000: it shrunk to $5,062.
The total paid during those 58 months was $8,463.

2. Now we focus on the second loan with 10% interest. 
The second loan already shrunk to $5,062. 
While paying off the second loan, the smallest loan took care of itself. There were only $203 left to pay. It was completed in a few months. 

It took 9 months and the total payments for the second loan were $5,262.

Totals for the Highest Interest First Method 
:
$20,000 loan: $30,032, 58 months
$10,000 loan: $8,260, and 5,262, additional 9 months
$1,000 loan: $1,126, 0 extra months, it was paid off with minimum payments only wile paying of the other two loans
Total payments: $44,680
Total time to pay off: 67 months or 5.6 years

So it is $52,342 versus $44,680. The Highest Interest First Method wins.