Debt avalanche method

Pay off your debt and save by paying off your highest-interest debts first.

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Snowy mountain avalanche

The debt avalanche method is a popular way to pay off large amounts of debt. By tackling your highest-interest debts first, you can reduce the total amount of interest you pay — saving you big in the long run.

How is the debt avalanche method calculated?

The debt avalanche method is calculated by ordering your debts from highest interest rate to lowest, not highest balance. After making the minimum payment on all of your debts each month, you then put any leftover money toward your highest-interest debt first. Once that’s paid off, you put that minimum payment and any extra money toward your next highest-interest debt, and so forth, until all of your debts have been repaid.

Follow these steps to calculate the order you should repay your debts using the debt avalanche method:

1. Create a budget to determine your cash flow.

Figure out how much money you have coming in each month and how much you need for your monthly bills — including the minimum payments to your creditors. If you can cut back on things like a cable subscription or daily coffee, you’ll increase your cash flow and have more money left over to put toward your debts.

2. List out all of your debts and the minimum monthly payments.

For every debt, list your balance, interest rate and minimum payment. This gives you an overview of how much you owe and help you determine which debt to tackle first.

3. Order your debts from highest interest rate to lowest.

Remember, this method is about the interest rates, not the actual amount you owe on each account. The higher the interest rate, the more that debt will cost you in the long run.

4. Prioritize the most expensive debt.

Once you have your debts in order, put any extra cash each month toward the credit card or loan with the highest interest rate. Even $50 over the minimum monthly payment will help pay it off sooner, so there’s no amount too small.

5. Increase extra payments as debts are eliminated.

After you’ve paid off your first loan or credit card, keep the avalanche going by applying your excess monthly cash and your paid-off debt’s monthly payment toward your second most-expensive debt — and so on.

The total time it takes to completely pay off your debts will depend on how much you owe, your cash flow and your ability to stick to a budget.

The debt avalanche method in action

Let’s take a look at an example: Catherine is a single woman in her early 30s and has finished paying off her student loans for her undergraduate degree.

The amount she can spend on her debts each month is $500. She has two credit cards, a car loan and a personal loan. She’s decided to use the debt avalanche method to save on interest in the long run and open up room in her budget for a mortgage payment down the road.

DebtBalanceMinimum paymentAPR
Credit Card A$1,500$4518.99%
Credit Card B$4,000$8015.45%
Personal Loan$3,000$7013.1%
Car Loan$5,000$1206.99%

As you can see, her car loan takes up the majority of her monthly budget, but it’s the two credit cards that are actually the most costly when you order things based on APR.

Since Catherine has $500 to put toward paying off her debts each month, she’d make the minimum monthly payment for each bill — totaling $315 — then put the remaining $185 toward Credit Card A until it’s fully paid off.

After, Catherine would tackle Credit Card B by combining that $185 with the $45 monthly payment for Credit Card A she no longer has, then repeat the process until all of her debts are paid off.

What do the experts say?

Unlike the debt snowball method, the debt avalanche method focuses on math to determine the most efficient and cost-effective way to pay off debt. While this method won’t provide motivation along the way, it will save you more money in the long run because it decreases the amount you’ll be paying in interest.

The Journal of Consumer Research recently determined that consumers who pay off smaller balances in full were able to get out of debt faster than those who focused on larger amounts. However, this doesn’t take into account how much more money you’d end up spending on interest. From a purely mathematical standpoint, the debt avalanche method is the best debt payoff strategy, but only if you’re able to commit to the plan.

Is the debt avalanche method right for me?

Like any financial strategy, there are pros and cons to the avalanche method.

Pros

  • Quickest way to pay off debt.
  • Visualize your financial situation to plan for the future.
  • Minimize interest payments for most cost-efficient debt repayment.

Cons

  • No psychological motivation from paying off small debts.
  • Can be tough to stay on track without checkpoints.

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Bottom line

Although it takes a lot of discipline, it’s possible to become debt free and save on interest in the process by using the debt avalanche method.

Find out how it compares to the debt snowball method to find the best strategy for you.

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