What is the Debt Avalanche Method
One of the worst things about being in debt is the amount of money you end up losing in the form of interest payments over time. If your outstanding balance and interest rate is high enough, it could amount to thousands of dollars.
To avoid this scenario, paying off the debt with the highest APR first is always a good idea - and that’s what the debt avalanche method is all about. The sooner the highest-costing debt is paid, the less interest it will accumulate over time.
How to use it?
An avalanche begins at the highest point of a slope, and when you use the avalanche method, debt that has the highest APR is paid first. Here’s what you’ll need to do.
- Make a list of all your debts - credit cards, medical debts, auto loans, student loans, etc.
- Check the APR (interest rate plus additional fees) on each of them and sort them from highest to lowest.
- Calculate your total monthly minimum payments - you’ll need to pay these on time each month to avoid penalties and higher interest rates.
- Set an extra payment amount above the minimum payment - you’ll want to aim for an amount that lets you reduce your debt over the months.
- As you repay your highest-APR debt, you’ll roll its payment into the second-highest APR debt and so on. Eventually, you’ll clear all your debts and save a ton on interest payments.
By paying down your most expensive debt first, you’ll free up more cash to pay down your lower-APR debts. The avalanche method makes mathematical sense - and more importantly, it’s one of the fastest ways to end up debt-free.
Let’s take a look at an example that will illustrate the method in more detail.
Debt Avalanche Example
To see how it works, let’s take a look at a list of debts that will look familiar to most of us.