What is debt avalanche strategy?
Debt Avalanche is a very popular and effective debt repayment strategy. It focuses on paying off the most expensive debt first, followed by the debt with the next most expensive debt, and so on. This strategy involves concentrating on paying off your highest-interest debt first, contrary to the debt snowball method which focuses on paying off the smallest debt first. This method can help you save money on your interests while keeping the repayment period relatively shorter.
Key Takeaways:
- Debt avalanche is a debt repayment strategy where you first focus on paying off the debt with the highest interest and work down from there
- Helps you save money on interest charges with a relatively shorter repayment period
- It requires discipline and self-motivation
How to implement the debt avalanche method?
Now that you have a basic understanding of the method, let’s break the concept into an easy step-by-step process that you can easily implement in your debt repayment strategy.
Step 1: List down all your outstanding debts. For each debt, list down the total amount you owe, the minimum monthly payment you need to make, and the interest rate.
Step 2: Arrange the list with descending interest rates. So, the highest-interest debt will be at the top of the list, followed by the next most expensive debt, and so on.
Step 3: Now focus on paying off the debt with the highest interest rate. Try to put as much money as your budget allows into this till the debt is fully paid.
Meanwhile, keep on paying the minimum monthly payments for all the other debts so that you can maintain a good credit score while keeping other debts in control.
Step 4: Continue this process until all your debts are paid off. Once you are done with the debt with the highest interest rate, you can move on to the next highest-interest debt. You can use the money which was previously allocated to the first debt to pay off this debt. Keep on repeating the process till all your debts are fully paid off.
Throughout the whole process, update your list every month as your balance decreases and eventually gets paid in full.
Advantages of debt avalanche strategy
- Help you save money in interest charges: One of the most advantages of adopting a debt avalanche strategy is that you are getting rid of the highest-interest debt first. This will help you save a considerable sum of money in the form of interest charges.
- Shorter repayment period: Since this method ensures the least interest accumulation, you can pay off all your debts a lot quicker compared to other methods.
Disadvantages of debt avalanche strategy
- Can be demotivating in certain scenarios: If your highest-interest debt is also the biggest one, it may take a while before that debt is fully paid off. Hence, You may not see the progress right away, making it harder to stick to your repayment plan. In such cases, it is always recommended to update your list every month so that you can track the process to keep yourself motivated.
- It takes discipline and longer-term commitment to pull off.
Is the debt avalanche strategy right for you?
If you are someone who is
- Disciplined and self-motivated
- Have sufficient disposable income
- Willing to save money and time in the longer term
Then the debt avalanche strategy is right for you.
The Bottom Line
Living in debt can be stressful and figuring out the right strategy to pay off debt can be overwhelming at times. The debt avalanche is a simple and effective strategy that minimizes interest payments. It requires you to be disciplined and self-motivated, and if you stay on track, you can save a considerable amount of your hard-earned money in the form of interest charges. It is not necessarily better or worse than other repayment strategies like debt snowball, debt consolidation, or balance transfer. It ultimately comes down to you what works best for your income and lifestyle.
