How to Use the Debt Avalanche Method to Pay Off Debt

If you’re struggling with debt, you’re not alone. In fact, according to a report by the Federal Reserve, the total household debt in the United States reached a staggering $14.56 trillion in 2020. However, there are proven strategies you can use to effectively reduce your debt and achieve financial freedom. One such strategy is the debt avalanche method.

What is the Debt Avalanche Method?

The debt avalanche method is a debt repayment strategy that involves paying off your debts from the highest interest rate to the lowest, regardless of the balance. The idea behind this method is to minimize the amount of interest you pay over time, which can help you become debt-free faster.

Here’s how it works:

  1. Make a list of all your debts, from the highest interest rate to the lowest.
  2. Make the minimum payment on all your debts except the one with the highest interest rate.
  3. Put as much money as possible towards paying off the debt with the highest interest rate until it’s paid in full.
  4. Once the debt with the highest interest rate is paid off, take the money you were putting towards that debt and apply it to the debt with the next highest interest rate on your list.
  5. Repeat this process until all your debts are paid off.

Why the Debt Avalanche Method Works

The debt avalanche method is effective because it targets the debts that are costing you the most money in interest charges. By focusing on paying off high-interest debts first, you can save a significant amount of money over time.

For example, let’s say you have a credit card with a balance of $5,000 and an interest rate of 18%. If you only make the minimum payment of $100 per month, it would take you over 30 years to pay off the debt, and you would end up paying over $10,000 in interest charges alone. However, if you use the debt avalanche method and put an extra $300 per month towards that debt, you could pay it off in just over a year and save thousands of dollars in interest charges.

An Example of the Debt Avalanche Method in Action

Let’s say you have the following debts:

  • $10,000 credit card debt with a 20% interest rate
  • $5,000 personal loan with a 12% interest rate
  • $2,000 car loan with a 5% interest rate

Using the debt avalanche method, you would start by paying off the $10,000 credit card debt first, since it has the highest interest rate. Let’s say you can afford to put an extra $500 per month towards your debt repayment efforts. Here’s how it would work:

  • Month 1: Pay $500 extra towards the credit card debt, bringing the balance down to $9,500.
  • Month 2: Pay $500 extra towards the credit card debt, bringing the balance down to $9,000.
  • Month 3: Pay $500 extra towards the credit card debt, bringing the balance down to $8,500.
  • (Repeat until the credit card debt is paid off, which would take approximately 20 months.)

Once the credit card debt is paid off, you would take the $500 you were putting towards that debt and apply it to the next highest interest rate debt on your list, which is the $5,000 personal loan. Here’s how it would work:

  • Month 21: Pay $500 extra towards the personal loan, bringing the balance down to $4,500.
  • Month 22: Pay $500 extra towards the personal loan, bringing the balance down to $4,000.
  • Month 23: Pay $500 extra towards the personal loan, bringing the balance down to $3,500.
  • (Repeat until the personal loan is paid off, which would take approximately 10 months.)

Finally, you would focus on paying off the $2,000 car loan, which has the lowest interest rate. Since you’re already putting $500 extra towards your debt repayment efforts each month, you could pay off the car loan in just 4 months.

Tips for Making the Debt Avalanche Method Work for You

If you’re interested in using the debt avalanche method to pay off your debts, here are a few tips to keep in mind:

  1. Be patient and persistent. The debt avalanche method may take longer to show results than the debt snowball method, as you’ll be focusing on paying off your highest interest debts first. However, stick with it and trust the process, as you’ll save more money on interest in the long run.
  2. Use a debt repayment calculator or spreadsheet to track your progress and stay motivated. Seeing the numbers go down over time can help you stay focused on your goal of becoming debt-free.
  3. Consider negotiating with your creditors to lower your interest rates. If you have a good payment history and credit score, you may be able to negotiate a lower interest rate on your credit cards or loans, which can help you pay off your debts faster using the debt avalanche method.
  4. Look for ways to earn extra income to put towards your debt repayment efforts. Consider starting a side hustle, freelancing, or selling items you no longer need to generate extra cash to put towards your debts.
  5. Avoid taking on new debt while you’re working to pay off your existing debts. It can be tempting to use credit cards or take out loans for emergencies or big purchases, but this can set you back and make it harder to become debt-free. Instead, focus on building up an emergency fund and saving up for big purchases in advance.