The Debt Avalanche Method

Debt Repayment for the Disciplined and Money Savers

While not as popular on radio talk shows as the Debt Snowball method of repayment used to accelerate your debt repayment, the Debt Avalanche has been around longer and is considered by most financial experts as the best method for minimizing interest paid. By focusing extra payments on your account with the highest interest rate, the Debt Avalanche reduces the amount of interest you will pay over time and the corresponding time it will take to repay your debts. The Debt Avalanche is just one of many methods you should consider when seeking to accelerate your debt repayment plan.

Here are the steps to the Debt Avalanche method:

  • Write down what your minimum monthly payments are for all your current debts.

  • Do not use your credit cards, store cards or other lines of credit again, at least until they are paid off in full and you are ready to use them responsibly.

  • Create a list of all your debts (credit cards, store cards, car loans, home loans, personal loans, old utility bills, old cell phone charges, student loans, etc.) and place them in order from the account with the highest APR (Annual Percentage Rate, aka Interest) at the top and the lowest APR at the bottom. This is your debt attack order.

  • Make minimum payments to every account on your list except the account at the top. Add all available cash to the minimum amount due on the account at the top of your list and make the payment.

  • Each time you pay off an account, add the payment previously being sent on that account to the account at the top of the list. This is known as “rolling over” your payment.

  • Become credit card debt free in just three or four years rather than fifteen to twenty-five years at standard minimum payments. Including your car and mortgage payments in this process could cut your repayment terms in half.

Who Is the Debt Avalanche for?

The debt avalanche repayment method works best for any individual or household looking for a way to pay as little interest as possible during the repayment period. The individual or household must also be disciplined and committed to the plan. This plan will demand patience and possibly some tenacity to complete. If you choose this plan, your motivation must come from the ultimate goal of living debt free, not from the progress you hope to see. Such progress can appear slowly, though overall, this is your fastest method of monthly repayment plans to achieve debt freedom.

 
 

Since it might take two to four years or more to pay off the first account on your list (depending, of course, on your individual circumstances), any individual or household embarking on this repayment plan method will need to possess sufficient patience and discipline to see the plan through to the end. Unfortunately, since we do not often get into crushing consumer debt due to too much self-discipline, this required character trait may not be present as often as hoped for.

By using the Debt Avalanche method, you can get out of debt in a fraction of the time of standard minimum payments while also cutting the amount of interest you pay to just a fifth or less of the standard method.

How does the Debt Avalanche Method Work?

As the name implies, the Debt Avalanche generally starts with relatively small payments and picks up size as the balances cascade downward toward $0.

To maximize this method, find an additional $50 to $200 or more to include with your payment to the debt at the top of your list. If you are unsure of how to come up with this extra payment, look over our PowerCash tool and calculator for help.

Send your extra payment each month to the creditor on top of your list. Once you have paid off your first account, use that account’s former payment and the extra payment you were sending there and add it to the next debt on your list. Roll over such payments every time you pay off an account.

Be careful not to start spending any freed-up money again on consumer purchases once you pay off an account. Remember that your goal is to experience debt freedom not continual debt.

An Example of the Debt Avalanche Method

Here is a comparison of the Debt Avalanche method against the standard Minimum Monthly Payment method. This comparison includes two scenarios, one Avalanche without extra PowerCash and one Avalanche with $50 in PowerCash. The balances are similar on the cards to make the demonstration easier to follow:

Scenario

Number of credit cards: 4

Balance on each card: $4,000

Minimum Monthly Payment Calculation: 3% of Balance

Annual Percentage Rates (Interest): 10%, 13%, 16% and 20%

Initial Monthly Minimum Payments: $120 for each account ($480 total)

Minimum Monthly Payment Method

Time to Pay Off: 17.0 years

Total Interest Paid: $11,155 (an extra 70% of the original balance)

Debt Avalanche Method without PowerCash:

Time to Pay Off: 3 years 4 months

Total Interest Paid: $4,221

Using the Debt Avalanche method, even without an additional monthly payment, over minimum payments means you will be debt free nearly 14 years sooner and will have paid 62% less interest ($6,934).

Debt Avalanche Method with $50 PowerCash

Time to Pay Off: 3 years 0 months

Total Interest Paid: $3,554

Using the Debt Avalanche method with $50 PowerCash over minimum payments means you will be debt free 14 years sooner and will have paid 68% less interest (that is $7,600 you keep in your pocket).

Keys to Debt Avalanche Success

Besides committing to and sticking with your Debt Avalanche repayment plan, there are additional actions you should take to see your plan through to success. They include the following:

  • Contribute to an emergency savings fund EVERY month, even if it is just a few dollars.

  • Put together a spending plan (aka “budget”) so you know how much you can spend on all aspects of your life.

  • If you get a raise at work, take on another job to earn a second salary, receive a cash gift, or get a tax refund, split the additional income between your emergency savings fund, a retirement plan, and your Debt Avalanche repayment plan. You do not need to split the income evenly, but commit to contributing a fair share to each activity.

  • Continue to live below your budget so that you avoid consumer debts in the future.

  • Keep track of your progress. Create a line graph that shows your debt balances on the vertical (left) axis and the month on the horizontal (bottom) axis. After just four or five months, you will see a line forming that will point to your estimated pay off date.

  • Consider throwing yourself a debt freedom party. The month after you become debt free, consider using no more than half the money previously sent to your creditors to celebrate your achievement. It might be a small trip, a wardrobe makeover, a service you have never paid for before (e.g. home cleaning, car detailing, etc.), or some other treat. Enjoy the feeling of freedom that you have just generated through your hard work and dedication.

Now that you have a grasp on how the Debt Avalanche works, determine whether it is the plan for you. Consider the Debt Snowball, Landslide and Cascade methods as well. Regardless which plan you choose, get started today. The sooner you start, the sooner you can celebrate your debt freedom.

Related Information: How To Get Out Of Debt Quickly