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Debt Avalanche: Boost Your Debt Repayment With This Strategy
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Paying off debts can feel impossible, especially if you’re paying minimum amounts each month. If you have extra money left over after you pay your bills, and you want to knock off debt at an accelerated rate, then you might be interested in a repayment strategy called the debt avalanche.
By aggressively targeting your debt according to the highest interest rate, you may soon cut down on your debt while saving money on interest. Here’s what you should know:
What is debt avalanche? The basics
A debt avalanche, also referred to as “debt stacking,” is a popular repayment strategy. It involves putting extra money toward your outstanding debt with the highest interest rate as you make the minimum payment on your other debts.
Once you’ve paid off the targeted debt, you’ll move on to the second-highest APR and so on until all of your debts are paid off. If two of your debts have the same APR, you should prioritize the one with the higher balance.
How a debt avalanche works
If you have several debts, creating a debt avalanche worksheet can keep you organized as you repay debt.
- List out all your debts in order of the highest APR rates. If more than one debt has the same APR, list those debts in order of the highest amounts.
- Next, write down the monthly minimum payments for each debt that you owe.
- In the next column, write out your current payments. If you’re just paying the minimums due, these will be the same as your minimum payments column.
- Following that, document the balance that is owed on that credit.
- In the final column, list out each debtor’s interest rates and be sure to organize your list in order of highest to lowest interest rates.
Here’s an example of a debt avalanche worksheet:
|Type of Debt||Minimum Payment||Current Payment||Balance||Interest Rate|
|Credit Card No. 1||$100||$100||$2,000||22%|
|Credit Card No. 2||$139||$139||$4,000||15%|
In the above example, it would take you 86 months to pay off your debt if you only made the minimum monthly payments.
However, let’s say you have an extra $250 to put toward your debt each month. Using the debt avalanche method, you’d begin by repaying credit card No. 1, followed by credit card No. 2, then the personal loan and finally the car loan. If you were to stick to this plan and pay off your debt using the debt avalanche, it would take you just 40 months to get out of debt — or about half the time.
Pros and cons of a debt avalanche
A debt avalanche can go a long way toward shaving interest costs, so financial experts generally consider it to be the most financially sound way of paying off debts.
However, it’s possible that the debt with the highest APR is also the debt with the highest balance, which means you could lose motivation spending months or even years chipping away at the same balance.
Here’s a quick look at what to consider before taking on this payoff strategy:
|Debt Avalanche Method|
Debt snowball vs. avalanche
Wondering what’s better for you — a debt snowball versus a debt avalanche? Here’s what you need to know if you’re choosing between the two:
- The debt snowball is arguably more popular and involves paying off debts from smallest balance to largest balance without taking APR into consideration. Because you start by paying off debts with the smallest balance, you often knock out entire balances more quickly than you would with the debt avalanche method.
- For most people, a debt snowball works best when they have a steady amount of extra cash to pay off debt. That’s because this repayment method assumes that as soon as one debt is paid off, you’ll take the minimum that you would have paid on that debt and apply to the debt with the next smallest balance — in effect “snowballing” the amount you owe.
- Many people like the debt snowball method because of the motivation that comes from paying off a debt once and for all — often in as little as a few months. While the debt avalanche will help you save more money on interest and pay off your overall debt sooner, research has shown people tend to be more successful with the debt snowball method because of the psychological boost that comes from eliminating an entire balance.
Choosing a repayment method that is right for you
When it comes to choosing a debt repayment method, it’s more important to pick the strategy you know you’ll stick with. Go for the debt avalanche if you know you’re disciplined, as it makes more sense financially. If you think you’ll struggle staying motivated with the debt avalanche and know you’ll benefit from the small “wins” associated with clearing entire balances, go for the debt snowball.
What matters most isn’t the strategy you choose, but rather your commitment to sticking to a repayment plan for most likely months, if not years. Both the snowball and avalanche method are known to help pay debt. You’ll become debt-free with both approaches — and that’s the most important thing.