Debt Avalanche Method: Everything You NEED To Know!
You have decided to get out of debt as quickly as possible--I am so excited for you!
But, to get out of debt, you need to have a strategy.
Today, we are going to go over everything you need to know about the Debt Avalanche Method. You will learn what it is, it’s pros and cons, and how to decide if this is the best debt repayment strategy for you.
The most common debt repayment strategies are the Debt Avalanche (which we are talking about today), the Debt Snowball, and Debt Consolidation.
Without a strategy to achieve your financial goals, I can almost guarantee that they won’t happen as quickly as they could.
So let’s discuss the Debt Avalanche Method to see if it is a good fit for you and your financial goals.
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What is the Debt Avalanche Method?
You know when an avalanche starts falling at the top of the mountain in a giant heap of snow? That’s the whole idea of the Debt Avalanche Method.
The Debt Avalanche Method is when you take all of your debts and organize them from highest to lowest interest rates--regardless of their balance. Then, you focus your efforts on paying off the balance with the highest interest rates while paying the minimum monthly payment on every other balance.
Once the highest interest rate is paid off, you roll that money over into the next highest rate, and so on.
By tackling debt with the highest interest rate, you will potentially save money on accumulated interest overall.
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How does the Debt Avalanche Method Work?
Okay, so let’s say you have three different debts under your name:
$3,000 of credit card debt at an 18% interest rate, $75 minimum monthly payment
$13,000 auto loan at a 3.6% interest rate, $350 minimum monthly payment
$40,000 student loans at a 5% interest rate, $400 minimum monthly payment
You have $1,500 per month to (on average) to contribute towards debt.
Because your credit card debt has the highest interest rate, you focus your energy towards paying off your credit card. During this time, you pay the minimum monthly payment on the auto and student loans. That means you are contributing $750 a month towards your credit card debt until it is paid in full.
Then, you focus your energy on paying off the balance with the second highest rate--your student loans. You take the $750 you were paying towards your credit card each month and roll it over to your student loan payment. You are now paying $1,150 a month towards your student loans, and $350 a month on your auto loan.
When you finally pay off the student loan, you now have $1,500 a month to throw at your auto loan.
If you want to calculate how the Debt Avalanche Method would look with your debt payments, check out this Debt Avalanche Calculator by NerdWallet!
Pros
The biggest pro of the Debt Avalanche Method is that it can save you money on interest in the long run.
I used the Debt Avalanche Method to eliminate my private student loans, which were losing me $160 a month in interest because they had a whopping 11% (!!!!) interest rate.
Cons
Because the Debt Avalanche Method prioritizes the debt with the highest interest rate, it may take longer to see progress on your debt repayment journey.
Since you don't get to check smaller balances off of your list as quickly, it can be harder to maintain the same level of motivation to pay them off.
This is especially true if your highest interest rate debt also happens to be the one with the largest balance.
Closing Thoughts
The most important thing is to pick a debt repayment strategy that works for YOU! How you go about pursuing your debt repayment goals is your own business--just make sure that you have a plan in place to do it.
If your priority is to save money on interest, then the Debt Avalanche Method is a good strategy to use.
If you struggle with maintaining motivation to pay off your loans, I would look into the Debt Snowball Method and see if it’s a better fit!
<3 Charlotte
P.S.
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