How Debt Avalanche Method Help You Pay Off Debt Faster?
Are you feeling stress over paying off debt, especially high-interest debt such as credit card debt?
Debt is a scary word, but knowing how to manage debt effectively can help you take control of your finance, and one of the best debt payoff method to reduce your debt is with the Debt Avalanche Method.
Here will be a complete guide to effectively use the debt avalanche approach to paying down your debt.
What is The Debt Avalanche Strategy For Debt Management?
The Debt Avalanche Method is a structured approach that focus on prioritizing your debts based on their interest rates. Debt Avalanche Method starts by paying your highest interest rate first while making minimum payments to the rest of the debt.
With the Debt Avalanche Method, Paying off your highest-interest debt first helps to save you a significant amount of money in the long run.
How Does The Debt Avalanche Work?
Debt avalanche works by focus on paying down debt that’s costing you the most money because of their high interest rate. Highest-interest debt can compounds the fastest making it hard to make the repayment as time goes.
Using the debt avalanche method, it will save you in the interest you may incur from the compounding of the high interest rate debt, which allows you to pay off your debt faster.
The debt avalanche method is designed to save you money on interest, so it may speeding up your journey to becoming debt-free.
It is a method that requires discipline and a long-term vision.
How To Use The Debt Avalanche Method to Pay Off Debt?
Using the Avalanche Method focuses on paying off your high-interest debt after you have created your own home budget to gain a better understanding of your own financial health. Here is how you can use the Debt Avalanche Method to become debt free.
1. List out all your outstanding debt
Begin by creating a comprehensive list of all your debts, including loan debts like:
- Credit cards
- Personal loans
- Auto loans
- Student loans
- Any outstanding bills.
For each debt, write down the following:
- Total amount of debt you owe
- Minimum monthly payment
- Interest rate
- Issuer of the debt
This list will give you an overview on the type of debt you have and give you an idea on where you are right now in terms of debt payment, and where you want to be in the future.
2. Arrange the list with the highest-interest debt first
Now, organize your list by arranging the debts from the highest interest rate to the lowest. This helps to:
- Identify the debt that has the highest interest.
- Give you an idea on the debt with the next highest interest.
- Down to the debt with the lowest interest and lowest priority.
Consider using a spreadsheet for better organization and flexibility in adjusting your numbers.
3. Pay Off The Debt With Highest-Interest Rate First
With your list in order from the highest interest rate to the lowest, here’s what you’ll need to do:
- Making the minimum payments to every debts on your list.
- Allocate all your excess funds toward your debt with the highest interest rate.
By doing so, you’ll reduce the interest that accrues, saving you money in the long run.
4. Increase Your Extra Payments As You Pay Off Debts
As you successfully eliminate your highest-interest first debt, like an Avalanche you accumulate extra cash that can be allocated to pay off the next highest interest rate debt.
With the debt avalanche method, debt is paid off faster each time you made your monthly debt repayment. This approach creates a snowball effect, accelerating your debt payoff process.
5. Repeat Until Debt-Free
Debt Avalanche method requires discipline, you’ll continue this process diligently until you’ve cleared all your debts.
Over time, you’ll notice the momentum building, making it easier to stay motivated on your path to financial freedom.
Debt Avalanche Method Example
Let’s take a look at how Debt Avalanche Method actually works with a real-life example. Consider someone with the following debts:
- Credit Card A: $5,000 at 18% interest
- Personal Loan B: $10,000 at 10% interest
- Student Loan C: $15,000 at 5% interest
Using the Debt Avalanche Method, they’d start by aggressively paying off Credit Card A, as it carries the highest interest rate. Once that’s done, they’d redirect the funds to Personal Loan B, and finally, Student Loan C. This approach minimizes the total interest paid and accelerates the debt repayment process.
Why Debt Avalanche Method Works?
The Debt Avalanche Method is effective because it prioritizes paying off the most expensive debts first, ultimately saving you money on interest payments.
This strategy is particularly advantageous for individuals burdened with high-interest debt, such as credit card balances.
Pros and Cons of the Debt Avalanche Method
Whether if you are using the debt avalanche and debt snowball methods to pay off your debt, there are pros and cons for each of the debt repayment methods.
Here are some of the pros and cons of using the Debt Avalanche Method to pay off your debts:
Pros Of Debt Avalanche Method
- Faster Debt Reduction: You have the potential to pay down remaining debts faster once high-interest debts are taken care of.
- Interest Savings: By targeting high-interest debts first, you can pay less interest over time.
- Ideal for High-Interest Debt: This method is well-suited for credit card debt or other high-interest debts.
Cons Of Debt Avalanche Method
- Slow Progress for Large Debts: If your highest-interest debt is one of your largest debts, this method can be more time-consuming.
- Perceived Slow Progress: Debt repayment progress may feel slow, potentially affecting your motivation to stick to the plan.
Why You Might Want To Use Debt Avalanche Method
You may want to use the Debt Avalanche Method to pay off your debt if you’re motivated by optimizing your debt repayment plan to pay off your debt fastest and most effective way possible.
Debt avalanche method will save in interest you’ll have to pay for the high interest debt for the long run.
Who Should Use The Debt Avalanche Method?
The Debt Avalanche Method is best suited for individuals with high-interest debts and the discipline to follow through with a long-term debt reduction strategy.
If you’re determined to pay off your debts efficiently and are not discouraged by slower visible progress, this method could be the right fit for you.
Popular Debt Repayment Strategies to Get Out of Debt
While the Debt Avalanche Method is highly effective, it’s not the only debt repayment strategy available. Here are some alternatives to consider:
- Debt Snowball Method: This approach prioritizes paying off your smallest debts first, regardless of interest rates, to gain quick wins.
- Debt Consolidation: You can consolidate your debts through options like a debt consolidation loan or a balance transfer credit card.
- Debt Management Plan: If you’re struggling with payments, consider working with a credit counseling agency to create a debt management plan.
- Debt Lasso: Reducing interest rate and consolidating all your high interest debt into low interest, you pay off your highest interest debt first and slowly work towards being debt free.
Is Debt Avalanche Method The Best Way to Pay Off Debt?
Deb reduction strategy like the Debt Avalanche Method excels in saving you money on interest but requires patience and discipline.
Ultimately, the best way to pay off debt is the one that aligns with your goals and motivates you to stay on track.
The effectiveness of the Debt Avalanche Method depends on your financial situation and personal preferences.
- Are you having a lot of high interest debt?
- Do you have the discipline to stick to your plan to pay off your debt?
- Do you have the self-motivation to keep going even where there is little visible progress?
If you say “Yes” to all of these questions, using the Debt Avalanche Method of paying debt might be for you.
However, if you say “No” or are unsure of any of these questions, then using the Debt Snowball Strategy might be a better idea, where you pay off debt with the smallest amount first before getting to the next smallest amount.
Becoming debt free is just the first step of wealth building, learning how to save and properly use your money to invest for wealth is key to building financial freedom.
Read Also:
- 7 Streams of Income to Build Wealth Now! (Powerful Income Ideas)
- How to Create Passive Income With Your Expertise Today (5-Easy Steps)
- How to Create a Budget for Beginners (Personal Finance Budgeting 101)
- How To Use The Debt Lasso Method To Pay Off Debt (Debt Free)
- How Much Do I Need to Save For Retirement at 55, 60, 65? (Retirement Calculator)
Join 900+ BUDDIES who are growing their wealth with our weekly Income Newsletter
Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).
