How to Use the Avalanche Method: The Step-by-step
Managing debt can feel like stepping into your first clinical rotation—totally overwhelming and confusing. With student loans, credit card debt, and other financial to-dos on your plate, it’s hard to know where to begin. But don’t worry—I’m here to help you out with a game plan that’s as straightforward as possible: the avalanche method.
What is The Avalanche Method?
So, what’s the avalanche method for paying off debt? It’s a debt repayment strategy that helps you manage your debt cost-effectively by minimizing the interest you pay and saving you more money over time. The main idea is simple: focus on getting rid of the debts with the highest interest rate first.
By focusing on paying off the highest-interest debts first, you can make sure that the extra cash is going where it can do the most debt damage. And get this: not only does this method save you money, but it decreases the overall time it takes to pay off your debts. Saving you time and money.
I will warn you that for this to work, you have to focus and be committed. But if you stick with it, it can be incredibly rewarding in the end. Just think of the weight being lifted off your shoulders after paying off all your debts.
So, without further ado, a step-by-step guide will help you get started with the avalanche method.
1. List your debts from highest to lowest by interest rate
Grab a piece of paper or open a spreadsheet and jot down all your debts. You’ll want to include everything, such as:
- Credit cards
- Student loans
- Personal loans
- Mortgages
For each debt, write down the balance, interest rate, and minimum monthly payment.
For example, let’s say you’ve got:
| Debt | Balance | Interest | Monthly Minimum Payment |
| Credit Card | $14,000 | 21% | $200 |
| Personal Loan | $50,000 | 12% | $500 |
| Student Loan | $25,000 | 5% | $150 |
| Auto Loan | $5,000 | 4% | $250 |
2. Rank Your Debts
Organize your debts from the highest to the lowest interest rate. You want to tackle the highest-interest debt first.
Don’t Forget: You have to keep making the minimum payments on all your debts for this to work. This is to avoid penalties and late fees, which will dig you into an even deeper hole.
3. Allocate Extra payments
Now, here’s where the magic happens. Pay the minimum on all your debts, but put any extra money towards the debt with the highest interest rate. This extra payment will help you pay off that debt faster and reduce the total interest you’ll pay.
For example, in the table above, your credit card debt has the highest percent interest rate at 21%. If you can throw an extra $200 a month towards that debt, you’ll be paying $400 in total each month to chip away at it faster.
3. Pay off the highest-interest debt
Keep putting any extra cash towards the debt with the highest interest rate until it’s completely paid off. Don’t forget to cover essentials and make all minimum payments on your other debts during this time.
4. Reallocate payments to the next highest-interest debt
Once the highest-interest debt is gone, take the amount you were paying towards it and apply it to the next debt on your list. For instance, once you’ve paid off your credit card debt, move that $400 payment to your personal loan debt.
5. Start the Avalanche (Method)
Keep following this plan, shifting payments from one debt to the next highest-interest one as you go. And remember, always make your minimum payments on other debts.
Bottom Line
Conquering debt may seem intimidating, but the avalanche method gives you a clear strategy for the path to success. By prioritizing high-interest debts, you decrease your overall interest cost over time and speed up your path to being debt-free. Now that you have the avalanche method, you can have control of your financial future!
Pingback: How to Pay Off Debt with The Snowball Method | Greener Scrubs