What Is the Debt Avalanche Strategy?
If you're feeling overwhelmed by your debt obligations and wondering how to get a grasp on your finances, you may want to explore a debt avalanche plan. Designed with both math and motivation in mind, this kind of debt repayment plan can help you lower your debt while saving on interest charges.
What Is the Debt Avalanche?
Also known as debt stacking, a debt avalanche is an accelerated plan for repaying high-interest debt, like credit cards and personal loans. This strategy involves tackling your highest interest rate debt first and putting any additional resources you have toward that debt. By prioritizing the repayment of debt with the highest interest rates, you'll reduce the amount of interest you pay and save money in the long run.
To get started, make a list of your debts, ordering them from highest to lowest interest rate. Here's an example:
- Credit Card No. 1: $5,000, Interest Rate: 19 percent, Monthly Payment: $150
- Credit Card No. 2: $6,500, Interest Rate: 17.25 percent, Monthly Payment: $125
- Personal Loan: $2,500, Interest Rate: 12 percent, Monthly Payment: $150
- Car Loan: $11,000, Interest Rate: 6 percent, Monthly Payment: $249
Once you have a list of your outstanding debts, determine how much extra money you have to put toward them. Let's say that you find you have an extra $150. In that case, you'd put the $150 toward your highest interest rate obligation's minimum monthly payment. This means you'd be paying $300 per month on credit card No. 1 until it's paid off, while just paying the monthly minimums on your other debts.
Once that highest interest rate debt is paid off, you'll roll that $300 into the minimum monthly payment for your next obligation on the list — here, a monthly minimum of $125 on credit card No. 2. So, you'll pay $425 each month on that card until it's paid off. You'll continue this "avalanche" until you've paid off all your debts.
How Does This Differ From Other Debt Repayment Strategies?
The debt snowball method is another popular debt repayment strategy. Unlike a debt avalanche though, which is about avoiding compounding interest, a snowball method is fueled by emotion. It feels good to pay off debt, so the debt snowball method targets your lowest balances first. The idea is that you'll get a rush from paying off smaller balances, which will hopefully keep you motivated to continue paying off your debts.
While you'll save more in the long run by using the avalanche method, the snowball strategy could be a better choice for you if you thrive on achieving shorter-term goals. You can use this calculator to compare the two methods.
Is a Debt Avalanche Right for You?
If you have multiple high-interest debts, the avalanche method may be a good fit for your long-term debt payoff goals.
Pros of the avalanche method versus the snowball method include:
- Saving more on interest charges
- Paying off debt in a shorter time frame
Cons of the avalanche method include:
- Delayed gratification, since you're paying off larger debts first
- Potentially losing the motivation to stick with your debt repayment plan
The best debt repayment plan is one that keeps you motivated and gets your debt paid off once and for all. Explore both methods to see which is the ideal fit for your finances in the long term. If you’re not interested in managing multiple payments another option is to consolidate your debt to a lower interest product to have one payment. However, if you have patience and want to save the most money, the debt avalanche method is your best bet: You'll pay off your debt in the shortest period and save the most in interest charges.