Debt Avalanche Method
There's no doubt that excessive debt can negatively impact your mental health and well-being. Additionally, getting out of debt can feel like an uphill battle. That’s why it’s crucial to have a plan to systematically tackle your debts so that you can work toward financial freedom.
The debt avalanche method is a solid plan to help you prioritize and eliminate debt more quickly. In this post, we’ll look at the debt avalanche method and how it compares to other ways you can pay off debt.
What is the debt avalanche method?
The debt avalanche method focuses on paying off high-interest debts first. Then, once you’ve repaid your highest-interest debt, you can eliminate the next highest-interest debt, and so on.
In other words, while paying extra on the first debt, you continue making minimum payments on other debts. After paying off the high-interest debt, put that minimum payment (and any additional money you’ve allotted for debt repayment) toward the next highest-interest debt. Continue with the debt avalanche method until all your debts have been repaid.
Benefits of the debt avalanche method
The debt avalanche method of paying off debt has many advantages. This method can help you:
Get out of debt more quickly
Using any debt repayment strategy will help you pay off debt faster than if you’d continued making minimum payments. As such, the debt avalanche method can accelerate your path to debt-free living.
Save money on interest
Paying off high-interest debts using the debt avalanche method can save you money in the long run. You can then use the money you save on interest to put toward other debts.
By using the debt avalanche method, you have a clear path to paying down debt. This can keep you focused, motivated, and organized, which makes you more likely to succeed in your financial goals.
Debt avalanche method vs. debt snowball method
You may have heard of a similarly named debt-reduction strategy called the debt snowball method. The snowball and avalanche debt methods are very different, however, so you’ll want to choose the one that makes the most sense for your situation.
The debt snowball method prioritizes smaller balances first, regardless of the interest rates. Once you’ve paid off your smallest debt, you can move on to the next-smallest debt, and so on, until you get to the largest debt.
After repaying each debt, you add its minimum payment (plus any extra you want to pay) to the next debt. By the time you get to the larger debts, you should be able to make larger payments to help pay them down quickly. Plus, paying off smaller debts first can be a big motivator because you see progress sooner.
But, since the debt snowball method doesn’t account for interest rates, you may end up paying more in interest over time than if you use the debt avalanche method.
How to use the debt avalanche method
Here’s what you need to do if you want to try the debt avalanche method:
1. Make a list of all debts
Whether you use pen and paper, spreadsheet software, or a note-taking app, jot down all your debts. Be sure to include each one’s interest rate, minimum payment, and total balance.
2. Organize your debts from highest to lowest interest rate
Sort the debts by interest rates in descending order, with the highest interest at the top and the lowest at the bottom. It doesn’t matter if the debt with the highest interest rate also has the lowest balance. With the debt avalanche method, we’re only concerned with interest rates right now.
3. Pay off the highest-interest debt first
Add up all your monthly minimum payments and figure out how much extra you can budget for debt reduction.
For example, let’s say that once your minimum payments are met, you have $150 you can afford to put toward credit card debt each month. All that $150 will go toward the debt with the highest interest rate (plus the original minimum payment). Keep making the minimum payments on the other debts – but pay the extra $150 on the high-interest one until you’ve paid it off.
4. Repeat the process until all debts are eliminated
After paying off the first debt, move on to the one with the next highest interest rate. Rinse and repeat until you’re debt-free!
Is the debt avalanche method right for me?
So, how do you know if the debt avalanche method is right for you? Not only does the debt avalanche help you pay down debt, but it can also help you save a substantial amount of money on interest. You might ask yourself whether that’s more important than paying off a smaller debt faster.
Compared to the debt snowball method, it takes longer to pay off that first debt with the debt avalanche. As such, if you’re the type of person who needs a feeling of accomplishment to keep going, the debt snowball method might suit you better.
Try the debt avalanche method
A little progress is better than none, so if the debt avalanche sounds like a method worth trying, now’s the time to get started! Check out our debt management articles to learn more.