Yahoo Finance How the 'Avalanche Method' Can Help You Shed Debt
You might feel like you're stuck on top of debt mountain, but you could always start an avalanche. That's where the debt avalanche repayment strategy comes in.
The debt avalanche makes a play on your largest interest debts first, which might seem slow, but ends up avalanching you to the bottom in no time.
Debt avalanche is often contrasted with the debt snowball repayment strategy, but if you're ok with steady progress over quick victories — using the debt avalanche is arguably the best and most cost-effective debt strategy.
Here's everything you should learn about the debt avalanche method.
What is the debt avalanche strategy?
The debt avalanche method involves aggressively paying off your debt with the highest interest rate — while making the minimum payments on the others — before moving on to the next highest.
This method helps you pay off your debts faster and at a lower cost, because you reduce your largest interest charges and associated fees.
How does debt avalanching work?
The debt avalanche method involves tackling your debts with the highest interest rates first.
Let's say you have a $30,000 credit card bill at 29% APR, $20,000 in student loan debt at 6% interest, and a $1,200 hospital bill that's interest-free.
Starting a debt avalanche, you would aim to pay off the credit card bill first with as much as you can squeeze out of your budget, and pay only the minimums on the other outstanding bills. Once your credit card is paid off, you'd move on the student loan, followed by the hospital bill.
Although it would take a lot longer to pay off the credit card than the hospital bill, you would save a substantial amount on interest in the long run.
Debt avalanche vs. debt snowball
To compare debt avalanche and the debt snowball strategy, it's important to understand that the debt snowball involves starting with the lowest interest balances first — while making minimum payments on the rest.
Recycling the above example, the debt snowball method starts by paying off the interest-free hospital bill, followed by the $20,000 student loan debt, and ending with the $30,000 credit card debt (which has the highest interest).
If you need short-term victories to motivate you, you’re a debt snowball candidate — but even though the hospital bill is an easy win, $30,000 at 29% APR will compound faster than you'd like.
Is the debt avalanche method right for you?
The debt avalanche method isn’t for those who seek instant gratification. Bigger debts take longer to pay off, and it may take a while before you start seeing any meaningful progress.
It takes patience and self-discipline to stick to the debt avalanche strategy.
No matter which strategy you choose, make sure you create a budget you can stick to while paying off your debts — and set aside whatever you can in an emergency fund for surprise expenses.
