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If you’ve read anything about personal finance in the past decade, you’ve probably heard of the debt avalanche method. The basic concept is simple:
Pay Off Debt with the Highest Interest Rate First.
It sounds easy enough, right? But just like any other debt repayment strategy, it has disadvantages too. In this post, I’ll discuss the pros and cons of the debt avalanche, so you can decide if it’s the right method for you.
What Is the Debt Avalanche Method?
The debt avalanche is one of two primary strategies used to repay debt – the other being the debt snowball.
When you use the debt avalanche method, you target your highest interest loans first, which makes it the fastest and least expensive way to pay off debt. (In contrast, the debt snowball targets the loan with the lowest balance first.)
Many people prefer the debt snowball for its fast victories. You feel a sense of achievement sooner by paying off smaller debts first. I personally use the debt snowball method because those “wins” help me stay motivated to keep going. If you’re more disciplined, the debt avalanche might work better for you.
In fact, the only real drawback of the debt avalanche is that you don’t have these little triumphs in the beginning, and it takes longer for you to have fewer debts on your list.
How to Use the Debt Avalanche Method
First, create a budget and determine how much extra money you have for debt repayment each month.
Here’s how to use the debt avalanche in three steps:
- List your debts in order of interest rate, starting with the highest.
- Put all your extra money toward the highest interest rate debt every month (while paying minimums on all others) until it’s completely paid off.
- Now put all your extra money toward the next debt on your list (including the minimum payment from the first one) until it’s paid off. Repeat the process until you’re debt free.
How it Works
Here’s an example of how the debt avalanche method works. Let’s say you have four debts with different interest rates, and you listed them in order of highest rate first:
You would attack the Mastercard debt first because it has the highest interest rate. It will cost you the most money in interest over time.
If you have $500 extra per month to put towards paying off your debt, here’s what your avalanche would look like:
The total debt would be paid off in 30 months, with $3,087.38 in interest paid. The debt with the highest interest would be paid off in just 10 months.
To see what the debt avalanche looks like for you, I recommend using this awesome debt avalanche spreadsheet from Vertex42 (pictured above). This is the spreadsheet I personally use, but I use it with the snowball method. (You can choose between the snowball or the avalanche from within the spreadsheet.)
Just enter in your debts, interest rates, and minimum payments, and it calculates your avalanche for you. Best of all, you’ll see your projected debt-free date! The free version allows up to 10 creditors, while the paid version allows up to 40.
Minimum Payments and Interest Rates
Log in to all your credit card and loan accounts to get the total balance and current interest rates for all your debts.
As I mentioned in my debt snowball post, the credit card companies do not make it easy to find your interest rate. It usually isn’t listed anywhere in your online account. If you get a paper statement, you can find it there. If not, download your statement electronically and read the small print at the bottom.
Use online calculators to calculate your minimum payments. If you haven’t used your cards lately, the minimum payment listed on your statement will be correct. If you’ve used your cards in the last 30 days, use this minimum payment calculator from Green Path.
NOTE: If you are still using your credit cards, stop right now! Even if you think you can use them responsibly, it’s better not to take the chance.
If your student loans are due, you can find your minimum payment online. If they aren’t due yet (but will be soon), use this calculator from Student Loan Hero to calculate your minimum payment.
When You Can’t Afford Your Minimum Payments
If you can’t afford to make the minimum payments on all your debts, I recommend using the debt snowball method until you get things under control. See my post on using the debt snowball for more information on handling this situation.
In short, keep making payments on the debts you can afford until they’re paid. Then move on to the rest. This method will take forever. You must find a way to increase your income or cut your expenses (or both) until you’re back above water.
Dominate Your Debt with the Avalanche Method
From a strictly mathematical point of view, the debt avalanche is the best way to pay off your debt. You’ll be debt-free sooner and you’ll pay less in interest.
If you can delay gratification, the debt avalanche will work wonders for you. You can dominate your debt and save money at the same time using this strategy. Many financial experts recommend it for this reason. The only real drawback is that it might take longer to see your number of creditors reduced compared to the debt snowball.
Regardless of the method you choose, the most important thing is to get started. Start paying off your debt NOW. The sooner you start, the sooner you’re free.
Make a budget (you can download my free budget tracker spreadsheet here), choose a repayment strategy, and start digging your way out. Start with your next paycheck. I know it’s scary to write down all your debts and face that number. But you’ll be surprised at how fast you can make progress – especially with the avalanche.
Do you have experience with the debt avalanche method or are you thinking of trying it? Leave a comment below and let us know!