What Is the Debt Avalanche Method?
Varying payment dates, interest rates — not to mention the temptation of an available line of credit — can make paying off debt a challenge. If you’re feeling trapped by your debt, one of the first steps you should take is to prioritize your debts and develop some kind of payoff strategy. There are several methods out there you can use, including the debt avalanche, which is one of the most popular ways to tackle debts.
The purpose of the debt avalanche is to help you pay down your debt while saving you the most possible money on interest charges in the process. In this post, we’ll explain how it works and how you can apply it to your debt.
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What is the debt avalanche method?
The debt avalanche strategy works like this: First, you list out your debts and you put them in order from lowest APR to highest APR. If there are any debts charging the same rate, the one with the higher balance will take priority. From there, you focus on the highest interest rate debt first.
You put as much money as you can afford toward that first, most expensive debt and continue making minimum payments on the other debts in the meantime. Once that debt is paid off, you will take the money you were using for that bill and roll it over into the next debt on your list and continue the pattern from there.
By paying off the debts charging you the most in interest, you end up saving money in the long run because you are paying off the most expensive debts first.
Putting the debt avalanche method into action
The debt avalanche is really just a 3-step process. Once you’re set up, you just continue to repeat the process until all your debt is paid off.
Step 1: Gather information about all your debts
Get organized by listing out all of your debts and then the key information that you’ll need to put the debt avalanche into action, including:
- Current balance
- The APR
- The minimum monthly payment required
Step 2: Order your debts from lowest APR to highest
While you are ordering them, be sure to also make note of the balance on those cards and the minimum payment.
Here is an example:
Debt 1: $1,000 on a credit card at 24% APR, $25 minimum due each month.
Debt 2: $300 on a credit card at 18% APR, $25 minimum due each month.
Debt 3: $800 on a credit card at 12% APR, $25 minimum due each month.
Debt 4: $2,500 on a personal loan at 8% APR, $25 minimum due each month.
Debt 5: $10,000 on a student loan at 4.50% APR, $100 minimum due each month.
Step 3: Determine how much you can afford to spend each month tackling your debt
Add up your minimum monthly payments. In this example, that’s $200.
Next, take a look at how much more cash you can comfortably afford to put toward your debts. If needed, make a plan to bring in additional income as well. We’ve got a handy list of ways to bring in extra income here.
Let’s say you determine you can pay an extra $175 per month on your debts.
To start with, you put that extra $175 toward your payment on the highest interest debt first. In the meantime, you make minimum payments on all your lower priority debts.
When you get rid of one debt, you roll the money you were using to pay down that debt into the next one and so on and so forth until all of your debts are completely paid off. In our example, all debts except for the $10,000 in student loan debt are paid off within 18 months. The debtor would continue to make payments on the student loan until it is paid off. Here is a table of how that looks using the numbers above.
|How the Debt Avalanche Method Works|
|Debt #1 : $1000 at 24% APR||Debt #2 : $300 at 18% APR||Debt #3 : $800 at 12% APR||Debt #4 : $2500 at 8% APR||Debt #5 : $10,000 at 4.5% APR|
|Month 6||Final payment: $25.14||Final payment: $188.07||$61.93||$25||$100|
|Month 9||Final payment: $153.94||$121.06||$100|
|Month 18||Final payment: $166.26||$208.74|
Debt avalanche vs. debt snowball: which is better?
The one disadvantage of the debt avalanche plan is that sometimes the most expensive debt is also the biggest debt we have to tackle. And it can feel like it takes ages to actually accomplish your first goal of paying down that first debt. That can make you feel demoralized, or discouraged because you’re not getting the quick satisfaction of watching one debt disappear rapidly.
The debt snowball strategy approaches debt payoff with this in mind. With this method, you order all of your debts by balance and your goal is to pay off the accounts with the lowest amount first. It’s an approach much used to tackle debt.
This won’t save you the most money on interest, but you may find it more motivational as it helps you earn some easy wins at the beginning and build momentum to keep paying down your debt. A recent study found the snowball method works better because it not only gives encouragement but people are more likely to stick with it because it helps instill the smart financial habits needed to tackle their more expensive debts later.
However, the downside to the debt snowball method is that it isn’t guaranteed to save you money in future interest payments, so it may ultimately be more costly to you.
The best option is the one that you can stick with. Give both of them a try and see which one you like best.
How to make the debt avalanche work for you
The major downside to the debt avalanche method is that it can be a bit difficult to “feel” the progress you are making if you are working to pay off large balances.
For example, if the account you need to tackle first has the highest interest rate and is also your highest balance, you may feel as if you aren’t making progress on your debts as quickly as you’d like and lose motivation. In those cases, the avalanche could actually end up having an effect opposite the snowball.
To keep yourself motivated, try not to watch too closely the debt you are working to pay down. Instead, make your payments for a few months and check every couple of months to see the progress you’ve made.
It can be helpful to reward yourself during any debt payoff process, so you don’t end up feeling constrained, which can result in a spending binge or giving up on your payoff process altogether. Take care to build small financial rewards into your budget to help make it go a little smoother.
Other ways to pay down debt quickly
In addition to the avalanche and debt snowball, there are other strategies you can use to pay off debt and save money on interest payments. The most notable alternative strategies would be the balance transfer and debt consolidation. If you get approved for a balance transfer credit card or a personal loan used for debt consolidation, they may prove to save you more money when compared with the debt avalanche.
Here are some alternatives to the avalanche:
Call your creditors and ask to lower the interest rate.
You are already being charged on your account. If you can get your rate reduced, that can speed up the process of getting out of debt.
Consider consolidating debt with a personal loan.
A personal loan is issued in a fixed lump sum and repaid over a fixed period of time. If you can qualify for a personal loan that has a lower APR than your debt, it may make sense to use that loan to pay off those debts. Then, you’ll be left with just one loan to tackle. Personal loans are especially good for consolidating credit card or medical debt. If you have student loan debt, however, you should look into options for refinancing with a private loan, or consolidating through the Department of Education.
Look for a good 0% intro balance transfer credit card offer.
Balance transfers are used for the most part when you have several credit card balances you are working to pay down. When you do a balance transfer, you transfer some or all of the balance from one credit card to another credit card charging a lower interest rate. In the long run, you’d save money on interest payments.
Ideally, you would open a new credit card with a 0% APR introductory balance transfer offer. Generally speaking, introductory periods last several months, so you will have time to pay down the balance interest-free. Companies usually charge a small fee to complete a balance transfer. Expect to pay about 3% of the amount you transfer.
Read our guide to using a balance transfer card first, because there are some key rules to follow before you take this approach.
Apply any windfalls or additional income to your top priority debts.
Whether that’s birthday money, an inheritance or a tax refund or even a second job.
Build an emergency fund.
If you have a savings fund in place, you’re less likely to lean on debt when accidents occur and you’ll prevent yourself from falling back into the debt cycle.
Lastly, don’t take on new debt.
You’ll only make matters worse if you continue to rack up new debts.
Getting out from underneath a mountain of debt can be a challenge, but having a plan can make it a little easier to get through the payoff process. The debt avalanche is a proven, efficient method you can use to pay off debts and save money on interest at the same time, but it may not be the perfect method for your personality or your budget. Be sure to compare your savings if you use alternative methods like a balance transfer credit card or a personal loan before you commit to the avalanche.