In this article we will discuss how to pay off debt with the avalanche method. Considered one of the best and most sensible methods for doing so. I know debt can be overwhelming, but you aren’t alone! As of June 2019, U.S. consumer debt rose 4.3% to $4.1 trillion. Tackling debt is best done with a plan and one step at a time. Don’t try to tackle it all at once.
First, let’s discuss the two types of debt – revolving, and installment.
Revolving debt primarily comes from credit cards where you can carry, or revolve, a balance from month to month. This allows you to spend up to a predetermined amount. Installment debt comes from mortgages, car loans, student loans, and personal loans. Where the size of your monthly payments is fixed from the start.
The first thing you should understand is that debt has a ripple effect across your entire financial life, especially your credit score. Which ultimately affects your interest rates and how much you can borrow. This can be detrimental when using a loan to purchase a home or car.
The Avalanche Method
If you only have one debt, your strategy is simple. Make the biggest monthly debt payment you can afford. Each month do this until it disappears. Essentially, rinse and repeat, until it’s all gone.
But if you’re like most people in debt, you have multiple accounts to manage which changes the strategy a bit. You need to find a debt repayment method that works best for you.
There are plenty of methods and you may have heard of a few. Especially, the strategies encouraged by financial guru Dave Ramsey — the debt snowball and the debt avalanche.
In this article, I will explain the debt avalanche method since it’s one of the best ways to pay off multiple credit cards when you want to reduce the amount of interest you pay.
Just remember there are plenty of strategies and this might not be the best for you. I will discuss the other ones in additional articles.
How to Pay Off Debt With the Avalanche Method
This debt elimination strategy, also known as debt stacking, focuses on the highest interest rate debt first. So, to start list your debt from the highest interest rate to the lowest.
The Step by Step Guide:
Step 1: Make the minimum payment on all of your accounts. Never go dink on an account to pay another. Know what kind of debt you have – secured or unsecured.
Step 2: List all your debt from largest to smallest by interest rate.
Step 3: Put as much extra money as possible toward the account with the highest interest rate.
Step 4: Once the debt with the highest interest is paid off, start paying as much as you can on the account with the next highest interest rate.
Step 5: Repeat this process until all your debts are paid.
Every time you pay off an account, you free up more money to put towards the next debt. Since you’re tackling your debts in order of interest rate, you’ll pay less overall and get out of debt more quickly.
Like an avalanche, as debt layers are removed it exposes the weaker ones causing a snowslide. It gains momentum and will fall away like a rushing wall of snow.
Pros and Cons
As with any method or idea, there are pros and cons. Ultimately, the debt avalanche will help you pay less in interest and get you out of debt quickly. Hence, why the debt avalanche is the preferred method for paying off debt.
What about the cons? It can take longer to pay off debt than other methods, especially the debt snowball method. So if you need motivation by winning in increments and quickly, this method might not be best for you.
In this article, we discussed how to pay off debt with the avalanche method. Remember, there are many methods for paying off debt and all of them should be considered. I will write about a few more methods that are popular, but ultimately it’s your decision. If you need help tackling your debt, call a fiduciary fee-only financial planner/advisor. They will have your best interests in mind and can coach you through the process.