How To Pay Off Debt Using The Avalanche Method

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How To Pay Off Debt Using The Avalanche Method – We get ourselves into debt in all different kinds of ways, but there’s really only 2 ways to pay it off: the debt snowball method and the avalanche method. Which method is best is really a matter of opinion. It’s a personal choice and depends on your specific circumstances.

 

In any case, the most important part is that you’re making the decision to pay off your debt. That’s half the battle. Now you must decide which method is the most beneficial to you and get busy putting that method into action. You can read more about the debt snowball method – but for now, we’ll focus on the avalanche method.

 

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 What Is The Avalanche Method?

The debt avalanche method allows you to repay your debts in the shortest amount of time. It also saves you the most on interest. From a mathematical standpoint, this is the more favorable method. It focuses on repaying the debt with the highest interest rate first. Once the highest interest rate debt is paid off, move onto the debt with the next highest interest rate, and assign it all extra funding.

 

Who Should Use The Avalanche Method?

This method is intended for those who aren’t looking for immediate reward and want the biggest bang for their buck. If your faith is in the numbers, the avalanche method is a good fit for you. This method takes longer to pay off each individual debt – but – if you’re patient, you’ll pay less on interest as a whole.

 

How Does It Work?

An example works best to portray the avalanche method. Let’s assume you have the following debts:

 

1. $10,000 car loan (annual interest rate: 7%)

2. $3,000 credit card debt (annual interest rate: 25%)

3. $15,000 student loan (annual interest rate: 3%)

 

For these 3 debts, let’s assume they each have a minimum monthly payment of $100. That’s a total of $300 a month. But, say you have $500 available each month to apply toward debt. After paying all your minimum payments, you have an extra $200 to pay toward your debt.

 

That $200 goes to your credit card debt (debt #2). Why? Because it has the highest interest rate of all 3 debts. That means you pay a grand total of $300 on your credit card debt this month ($100 minimum payment + $200 extra funds). Continue this until it’s completely paid off.

 

Once debt #2 is paid off, your focus moves to the debt with the next highest interest rate. In this example, it’s your car loan (debt #1). The payments you were making on debt #2 will now be applied to your car loan. Your new car loan payment is $400 a month ($100 minimum payment + $300 credit card payment). Continue this until it’s paid off.

 

Debts #2 and #1 are now paid off, leaving you with only your student loan debt (debt #3). It has the lowest interest rate, so it’s the last to go. All $500 is put toward this debt each month until it’s paid off.

 

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Before You Start

Before you can determine how much money you can put toward debt, you need to calculate your monthly expenses. First, create a budget to see how much you can realistically apply to the avalanche method. If there isn’t a lot of wiggle room in your budget, look for where you can make some cuts. Opt for Netflix instead of cable and lower your grocery bill with Ibotta.

 

STEPS

1. Get Your Debts In Order

First, prioritize your debts from highest to lowest interest rate. For our example, the newly-ordered list looks like this:

 

Priority          Description          Balance          APY          Minimum Payment

1                      credit card             $3,000             25%                  $100/mo.

2                        car loan                $10,000             7%                   $100/mo.

3                    student loan           $15,000             3%                   $100/mo.

                      Total Owed:           $28,000                                        $300

 

When you prioritize your debts, make sure to go by the interest rate you are actually paying. Don’t go by the rate you’ll be paying after a promotional period ends. Also be sure to record your minimum payments so you can quickly compare the payments to your extra funding.

 

2. Make Your Payments

Now that your debts are in order, it’s time to start making your payments. Be sure to avoid penalties by making all your payments on time. Pay the minimum on all debts except your first priority debt (debt #1: credit card). This is the debt all your extra funding will go toward.

 

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3. Repeat Each Month

Step 2 is not a one-time thing. It needs to be repeated each and every month. Once your first debt is paid off, start the process over and reorder your debts. Don’t assume your interest rates will always stay the same. Check for changes in rates, especially if there’s a special promotional period.

 

When debt #1 is paid off, move onto debt #2. The minimum payment and extra funding from debt #1 should now be allocated to debt #2.  For our example, debt #1 had a minimum payment of $100 and $200 extra funding was put toward it. Debt #2 also has a minimum payment of $100. You now pay $400 a month on debt #2 ($100 minimum payment + $200 extra funding + $100 minimum payment).

 

What About Savings?

If you’re putting money aside for savings, it may be a good idea to reduce the amount for the time being. At least until you pay off your high-interest debt. By doing so, you’ll actually be able to save more by eliminating your high-interest now, and putting money aside for savings later.

 

Free Resource

NerdWallet offers a Debt-Free Calculator. Enter in the information for each of your debts and your payment strategy (how much extra funding you can pay each month and the payoff order: avalanche or snowball). Your debt is then recalculated and shows how much you’ll save on interest and how much faster your debt will be paid off. It’s a great tool and super beneficial to your debt.

 

Paying off debt can seem like an impossible task. It can be easy to give up before you’ve ever really started. Be intentional about paying off debt with the avalanche method. Prioritize each debt and save money on interest. You have to start somewhere. The longer you wait, the harder it will be.

 

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