You’re ready to get out of debt as quickly as possible – I’m excited for you! I’m going to share everything you need to know about the debt avalanche method so you can find the right debt payoff strategy for YOU.
You’ll learn about the pros and cons of the Debt Avalanche Method. When paying off debt, you need a strategy. Without one, I guarantee you won’t reach your financial goals as quickly as they could.
Let’s see if the Debt Avalanche Method works for you and your money goals!
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 this method!
The Debt Avalanche Method is when you list out all of your debts from highest to lowest interest rates–regardless of their balances. You start by focusing all of your efforts on the highest interest rate debt.
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.
How Does the Debt Avalanche Method Work?
Let’s assume you have three debts to pay off:
- $2,000 of credit card debt with a 22% interest rate, $50 minimum monthly payment
- $15,000 student loan with a 8% interest rate, $350 minimum monthly payment
- $8,000 auto loan with a 6% interest rate, $275 minimum monthly payment
You have (on average) $675 per month to contribute towards debt.
Using the Debt Avalanche Method, you are going to make minimum payments to your student and auto loans. Since your credit card has the highest interest rate, you’ll want to focus all of your extra cash on that.
Let’s say you have an extra $450 in your budget every month to contribute towards your debt.
In 4 months, you will have paid off your credit card — REALLY, YES!
Next, you’ll focus your energy on the debt with the second highest interest rate–the student loan. Take the $450 you were paying towards the credit card and combine it with your student loan’s minimum payment amount. Your new amount to pay towards the auto loan is $800.
In another 19 months, you will have your student loan paid off!
After the student loan is paid off, you’ll roll that $800 minimum payment into your auto loan! This gives you $1,075 monthly auto loan payment.
In another 2 months, you’ll be completely be debt free!
Using the Debt Avalanche Method allowed you to pay off $27,095 of your principle balance and interest in 2 years!
If you had only paid the minimum payment towards your debt until they were gone, it would have taken 6 years and you’d be paying $30,029 total in principle and interest!
You saved $2,934 in interest using the Debt Avalanche Method!
Imagine what you could do with that extra money!
If you want to use the Debt Avalanche Method using your own number, Nerdwallet’s Calculator is a great resource!
The biggest advantage of the Debt Avalanche Method is that it can save you money on interest in the long run.
This method can sometimes get you out of debt faster!
It may take longer to see progress on your debt repayment journey because this method focuses on the debt with the highest interest rate.
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.
The most important thing to remember when choosing a debt payoff strategy is to pick the best one for YOU.
When 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!