Debt avalanche – How to use the method 

Debt avalanche is one of the top 3 strategies for paying off debts.

This alternative suits a calculating, patient and balanced person, and the first step is to make a list of your debts.

Then you have to sort all your debts from largest to smallest, taking into account the fees.

In this way, you pay the minimum amount required for all your debts.

For the debt with the highest interest rate, all the extra money is invested.

As a result, you get rid of larger debts until you are finally free of all of them.

Read on to find out more about the strategy.

What is the debt avalanche method?

This is a mathematically sound method for paying off your debts.

For example, let’s say you’ve done the math and noticed that after eliminating essential expenses, you have $500 available each month.

You decide to use this amount to pay off the following debts:

• A $2,000 line of credit with an 8% rate;
• Personal loan of $1460 at 12% interest;
• $800 on a credit card with an annual percentage rate of 26%.

Let’s continue, assuming that each debt has a minimum monthly payment of $50.

With the result, the first step is to take $150 out of the $500 for the minimum monthly payment on your 3 debts.

Using the debt avalanche method, the remaining amount ($350) is applied to paying off the credit card debt.

Note that the credit card debt isn’t paid off first because it’s the smallest, but because it has the highest interest rate.

After getting rid of the credit card debt, you would still have the extra $500 and would have to pay off the minimum of the other debts, which would total $100.

With that, the $400 would be applied to the personal loan.

After settling the debt, $50 would be used for the minimum payment and $450 to end the debt with the line of credit.

Another example of the method

Let’s assume that a person has 2 debts: the first is a bill for $600 (with an APR of 16.9%), and the second, $10,000 (with an APR of 26%).

Normally, everyone thinks that it would be ideal to get rid of the $600 debt first, but when we talk about debt avalanche, that’s not true.

Although it may seem daunting to deal with the $10,000 bill, this is the most interesting strategy because, when we look at the long term, you will spend less money because this is the debt with the most interest.

Always remember that credit card debts have compound interest.

In other words, the longer you leave it idle, the bigger the debt will be.

That’s why it’s best to get rid of the debt as quickly as possible.

Why do some people prefer this method?

Firstly, because this method allows you to pay off your other debts more quickly.

This is because you get rid of the debt with the highest interest rates first.

Secondly, as we saw in the last example, you pay less interest over time.

This is because by paying it off first, you are slowing down or stopping the capacity of your high-interest debt, accumulating even more interest.

Debt avalanche is also one of the preferred methods for people because it is especially useful for people who have credit card debt or other types of debt with high rates.

According to Experian, the average American has $6,365 in credit card debt.

This represents an increase of 8% compared to 2022 and the first time that the average credit card debt has exceeded $6,000 since 2019.

Another relevant piece of information is that credit card debt in the United States reached an all-time high in the second quarter of 2023, reaching $1.08 trillion.

And since this method helps individuals get rid of these debts, they prefer to use it.

But just like any other strategy, the debt avalanche has its cons.

For example, if your highest-interest debt is one of the largest, it will take you longer to pay off your debts.

Another problem is demotivation because the progress of debt repayment seems to be slow.

In other words, you may find it difficult to stick to your original plan and remain consistent for months or even years.

What are the benefits of the debt avalanche strategy as compared to the debt snowball?

In the introduction, we talked about this method being one of the top 3 strategies for paying off debts.

And the snowball method beats it because it is also one of these strategies.

However, the big difference is that, in this case, you pay off the smallest of all your debts as quickly as possible.

Then, after paying off the first debt, you take the extra amount and transfer it to the next smallest debt.

And this continues until all the bills are paid.

Note that as you pay off debts and transfer the extra amount to pay off another, the amount grows like a snowball, hence the name of the method.

For example, let’s say you have 3 debts:

• Credit card 1 – $2500;
• Credit card 2 – $1670;
• Personal loan – $3000.

When you analyze your finances, you realize that you can put $1000 towards paying off your debts.

So let’s assume that they all have the same minimum amount: $150.

This means that every month, you should use $450 to pay off all your debts.

With the remaining amount ($650), you use it to pay off the smallest debt, which would be credit card 2.

It’s a snowball because as soon as you finish paying off the first debt, you can invest $450 + $150 in paying off credit card 1.

More information on debt avalanche and snowball method

So, the main point that differentiates the debt avalanche from the snowball method is this:

If you’re not worried about getting discouraged along the way and are looking for a long-term strategy, the avalanche method will probably be best for you.

On the other hand, for those who prefer to see their progress quickly and believe that paying off small debts is rewarding, the snowball is best.

You see, this depends solely on your preference, because both methods are good.

Tips for using the method 

First, to use a debt avalanche, make a list of all your debts and their total balances.

In other words, you should know exactly how much you owe, from $10,000 in loans to the $1 you spent on a coffee on your credit card.

It is also essential that you know the interest applied to each of your debts.

Remember to structure the list based on the interest rates of the debts, from highest to lowest.

Ideally, you should do this with the help of a digital spreadsheet, because if you need to make any changes, you can do so quickly.

Next, analyze your financial budget to identify the amount you can put towards paying off your debts.

This should be an amount that you definitely don’t need for necessary expenses in your life.

Think about your debts again, but this time find out what the minimum amounts are for working with the debt avalanche.

What is the lowest amount you can pay each month to pay off all your debts?

Once you have all the information in hand, it’s time to set aside the minimum amounts and use the rest to pay off the bills with the highest interest rates.

At this point, we recommend that you learn about other strategies such as financial minimalism or how to earn extra income.

This is because any money you save or receive as extra income can help you speed up debt repayment.

Final debt avalanche tip

Finally, we should talk about an essential tip:

As you pay off your debts, use the extra money to pay off other debts.

Getting out of debt should be your top priority at the moment.

There’s no point in paying off a high-interest debt and then simply applying the money to other things, such as buying products or services.

Or worse: work as hard as you can to make extra income and, instead of using the money to pay off your debts, use it for something else you don’t need.

Take control and remember:

After paying off your first debt, apply all the monthly payments you were making to your next debt. 

Over time, all these extra payments will accumulate, helping to speed up the debt repayment process using debt avalanche. 

Daniel 2 de April de 2024