In the post Use The Snowball Method To Crush Debt Fast, I talked about how to improve your financial situation by paying off your lowest balance first, then the next smallest balance and then the highest balance last.
Here I go into the Avalanche Method that works just as fast but you save so much money in interest payments in the long run. The avalanche method is especially effective if you carry a lot of high interest debt.
The debt avalanche strategy, also known as debt stacking, works in a similar way to the debt snowball method. It differs in that it goes by the credit card balance or loan with the highest interest rate descending to the lowest rate.
Really, it does not pay off your debt any sooner but you will pay less interest. The breakdown per month is similar, but the order of payment is different.
The avalanche method is the concentration of extra money to pay down high-interest debt focused on the personal loan or credit card debt with the highest-interest debt rate first, and then the card with the second-highest interest rate, and then the next highest interest rate, all the way to the lowest interest rate last.
First let’s make sure you are including all of your debts.
What type of debt do I have?
Consumer Debt:
- Credit Card Debt: Accumulated when you make purchases using a credit card and do not pay off the balance in full each month.
- Personal Loans: Borrowed money from a bank, credit union, or online lender for personal expenses, such as medical bills, vacations, or debt consolidation.
- Payday Loans: Short-term, high-interest loans typically repaid on your next payday, often with extremely high fees.
- Mortgage Debt:
- Mortgage Loans: Long-term loans used to finance the purchase of a home. They typically have lower interest rates compared to other types of debt.
- Student Loans:
- Federal Student Loans: Loans offered by the government to help finance education. They often have favorable terms and flexible repayment options.
- Private Student Loans: Loans from private lenders to cover education expenses. They may have higher interest rates and fewer borrower protections than federal loans.
- Auto Loans:
- Car Loans: Loans used to purchase vehicles. The car itself serves as collateral, and failure to repay can result in repossession.
- Home Equity Debt:
- Home Equity Loans: Borrowing against the equity in your home. These loans often have fixed interest rates and can be used for various purposes.
- Home Equity Lines of Credit (HELOCs): Similar to home equity loans but function more like a credit card, with a variable interest rate and a revolving credit limit.
- Business Debt:
- Business Loans: Financing for businesses to cover operational expenses, expansion, or other business-related needs.
- Business Lines of Credit: A flexible form of financing that allows businesses to access funds as needed, up to a predefined credit limit.
- Government Debt:
- Treasury Bonds, Bills, and Notes: Securities issued by governments to raise funds. Investors purchase these and receive interest payments over time, with the principal repaid at maturity.
- Medical Debt:
- Medical Bills: Unpaid medical expenses incurred from healthcare services, treatments, or procedures.
- Tax Debt:
- Tax Liabilities: Unpaid taxes, including income tax, property tax, or other government levies.
- Secured vs. Unsecured Debt:
- Secured Debt: Backed by collateral, such as a home or car. If you fail to repay, the lender can seize the collateral.
- Unsecured Debt: Not tied to specific collateral. Lenders rely on your creditworthiness, and failure to repay can result in legal actions but not collateral seizure.
- Good Debt vs. Bad Debt:
- Good Debt: Investments in assets or opportunities that have the potential to appreciate or generate income, such as a mortgage or student loans.
- Bad Debt: Debt incurred for non-essential expenses or assets that depreciate quickly, such as high-interest credit card debt or payday loans.
- Government Debt vs. Private Debt:
- Government Debt: Debt owed to government entities, often in the form of bonds or loans to finance public projects.
- Private Debt: Debt owed to private entities, such as banks, credit card companies, or individuals.
Understanding the types of debt you have is crucial for effective financial management. It helps you prioritize repayments, make informed decisions about taking on new debt, and work toward achieving your financial goals.
Now, let’s make a pretend list of outstanding debts.
For example, you have 7 loans/cards at different rates as follows:
- Mastercard – balance of $668 at 22.9% interest rate and a minimum monthly payment of $141
- Auto Loans – balance of $3744 at 18.24% interest rate and a minimum monthly payment of $79
- Visa – balance of $20,107 at 17.99% interest rate and a minimum monthly payment of $600
- Student Loans – balance of $1480 at 16.24% interest rate and a minimum monthly payment of $66
- Discover – balance of $8585 at 13.24% interest rate and a minimum monthly payment of $194
- Bank Loan 2– balance of $11057 at 12.24% interest rate and a minimum monthly payment of $245
- American Express – balance of $3826 at 10.15% interest rate and a minimum monthly payment of $42
The avalanche Method would go as follows
Master Card @ $668 and 22.9% interest rate
- Auto Loans @ $3,744 and 18.24% interest rate
- Visa @ $20,107 and 17.99% interest rate
- Student Loan Debt @ $1,480 and 16.24% interest rate
- Discover @ $8,585 and 13.24% interest rate
- Bank Loan @ 11,057 and 12.24% interest rate
- American Express @ 3,826 and 10.15% interest rate
How The Avalanche method Works
First, for the debt avalanche approach, just as you would do with the snowball method, you will make one of your normal monthly payments on the first credit card. In the example, it would be Mastercard which has a regular payment of $141.
And, now you have figured out that with selling items and weekends jobs, you can put an extra $500 per month toward extra payments on your avalanche of debt.
Your new payment will be $641 ($500+141=$641) to Mastercard. As you can see, you will pay that card off in less than 2 months.
And, the first month’s payment will almost wipe the whole total debt out. Consequently, the payment for the second month on the same card will only be the remainder of $41.54.
In the second month, you will pay off the $41.54 on the Mastercard. Now, that debt is GONE!
Next in your debt repayment strategy, you will apply the additional payments of $500 from a side hustle, the normal payment of the car loan $79 AND the remainder of what your normal payment toward the Mastercard minus the $41.54. The total toward the car loan would be 500+79+99.46 (141-41.51) =678.46.
By the 7th month on the avalanche method, you will have paid off the car loan. Eventually, if you stay on track with this debt payoff strategy, the total amount of all debt will be paid in 33 months (or 2 years and 9 months). And, with every extra dollar you pay toward your higher-interest debt, it is the fastest way you will get out of debt.
NOTE: On the avalanche method and the snowball method you will continue to pay your monthly minimum payments on all of your other credit cards and loans.
The pay off graph would look as follows:
Pmt# | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| 1 | 641.00 | 79.00 | 600.00 | 66.00 | 194.00 | 245.00 | 42.00 |
| 2 | 41.54 | 678.46 | 600.00 | 66.00 | 194.00 | 245.00 | 42.00 |
| 3 | 720.00 | 600.00 | 66.00 | 194.00 | 245.00 | 42.00 | |
| 4 | 720.00 | 600.00 | 66.00 | 194.00 | 245.00 | 42.00 | |
| 5 | 720.00 | 600.00 | 66.00 | 194.00 | 245.00 | 42.00 | |
| 6 | 720.00 | 600.00 | 66.00 | 194.00 | 245.00 | 42.00 | |
| 7 | 351.78 | 968.22 | 66.00 | 194.00 | 245.00 | 42.00 | |
| 8 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 9 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 10 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 11 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 12 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 13 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 14 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 15 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 16 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 17 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 18 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 19 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 20 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 21 | 1,320.00 | 66.00 | 194.00 | 245.00 | 42.00 | ||
| 22 | 1,245.70 | 140.30 | 194.00 | 245.00 | 42.00 | ||
| 23 | 240.00 | 1,340.00 | 245.00 | 42.00 | |||
| 24 | 1,580.00 | 245.00 | 42.00 | ||||
| 25 | 1,580.00 | 245.00 | 42.00 | ||||
| 26 | 1,580.00 | 245.00 | 42.00 | ||||
| 27 | 228.33 | 1,596.67 | 42.00 | ||||
| 28 | 1,825.00 | 42.00 | |||||
| 29 | 1,825.00 | 42.00 | |||||
| 30 | 1,825.00 | 42.00 | |||||
| 31 | 264.58 | 1,602.42 | |||||
| 32 | 1,867.00 | ||||||
| 33 | 75.51 |
The Difference Between the Snowball Method and the Avalanche Method?
With the avalanche method, it is not as emotionally satisfying as the debt snowball strategy, but the advantage is that between the two methods on the avalanche method, you will pay a little over $1000 less in interest on this debt management plan!
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The Controversy About the Avalanche Method
There is much controversy over the snowball and the avalanche method. Some people swear that the snowball method works because it makes the process of debt reduction more gratifying by paying off the smallest debt. Some people swear by the avalanche method because in the long run, it saves money, and is more in keeping with becoming “financially mature.”
The snowball devotees would argue that the reason that people are so far into debt is because they were not financially mature in the first place.
Since I am not a licensed financial advisor, I can only give the opinion that whatever is a good fit for you is the method you should choose. I personally prefer the debt avalanche method because the length of time is the same and the advantage is that you save on interest.
NOTE: when you get an unexpected windfall of money, it can shorten your sentence greatly. These extra funds include gifts, bonuses and selling larger items. Be sure to re-calculate your payoff date every time. Even though it might seem like a drag, it is so inspiring.
Other methods of Getting Out of Debt Faster
1. Debt Consolidation Loan:
A debt consolidation loan is a financial tool that allows you to combine multiple debts into a single, manageable loan with a lower interest rate. Here’s how to use it effectively:
- Research Lenders: Start by researching reputable lenders and comparing their interest rates, terms, and fees. Look for a loan that offers a lower interest rate than your existing debts.
- Apply for the Loan: Once you’ve chosen a lender, submit an application for the debt consolidation loan. Be prepared to provide your financial information, including income and expenses.
- Pay Off Existing Debts: Once you’re approved for the loan, use the funds to pay off your existing debts. This simplifies your debt structure and may reduce your monthly payments.
- Stick to Your Budget: While a debt consolidation loan can provide relief, it’s crucial to avoid accumulating more debt. Stick to your budget and commit to making timely payments on your consolidation loan.
2. Balance Transfer Credit Card:
A balance transfer credit card allows you to transfer high-interest credit card balances to a card with a lower introductory or promotional interest rate. Here’s how to make the most of it:
- Choose the Right Card: Look for credit cards that offer a 0% introductory APR on balance transfers for an extended period. Compare cards and choose the one with the longest 0% APR period and low balance transfer fees.
- Transfer Balances: Once you have the card, transfer your high-interest credit card balances to the new card. This can save you a significant amount on interest charges.
- Pay Off the Balance: During the promotional period, focus on paying off the transferred balance as aggressively as possible. Make more than the minimum payment if you can.
- Avoid New Charges: Avoid using the balance transfer card for new purchases unless it offers a 0% APR on purchases as well. Otherwise, interest charges on new purchases can accumulate.
3. Negotiating a Lower Interest Rate:
Negotiating a lower interest rate with your creditors can directly reduce the cost of your debt. Here’s how to go about it:
- Contact Your Creditors: Reach out to your creditors, explain your financial situation, and politely request a lower interest rate. Emphasize your commitment to paying off the debt.
- Highlight Your Payment History: If you have a good payment history with the creditor, mention it. A history of on-time payments can strengthen your negotiation position.
- Be Prepared to Compromise: Creditors may not always agree to lower your interest rate, but they might offer other concessions, such as waiving late fees or extending your repayment terms. Be open to compromise.
The Bottom Line on the Avalanche Method
In this article, we’ve explored two powerful strategies for getting out of debt faster: the Snowball Method and the Avalanche Method. While both methods aim to help individuals improve their financial situations by paying off their debts systematically, they have distinct approaches.
The Snowball Method focuses on tackling the smallest balance debts first, providing a psychological boost as you eliminate individual debts quickly.
This method emphasizes motivation and the sense of accomplishment. However, it may not be the most cost-effective strategy in terms of minimizing interest payments.
On the other hand, the Avalanche Method, also known as debt stacking, prioritizes debts with the highest interest rates. By attacking high-interest debts first, you can save a significant amount of money on interest payments in the long run.
While it may not offer the same emotional satisfaction as the Debt Snowball Method, it is a more financially efficient approach.
The key difference between the two methods lies in the order of debt repayment. The Debt Snowball focuses on the smallest balance debts, while the Debt Avalanche prioritizes high-interest rate debts.
When choosing between these two methods, it’s essential to consider your personal financial situation and preferences. Some individuals may find motivation in the quick wins of the Debt Snowball, while others may prioritize the long-term savings offered by the Debt Avalanche method.
Ultimately, the most effective method is the one that aligns with your financial goals and helps you stay committed to your debt reduction plan.
Additionally, we’ve discussed the importance of understanding the various types of debt, including consumer debt, mortgage debt, student loans, auto loans, home equity debt, business debt, government debt, medical debt, and tax debt.
Recognizing the differences between secured and unsecured debt, good debt and bad debt, and government debt versus private debt is crucial for effective financial management.
Lastly, we’ve touched on other debt reduction strategies, such as debt consolidation loans, balance transfer credit cards, and negotiating lower interest rates with creditors.
These methods can also play a significant role in helping you become debt-free faster. However, it’s essential to approach them with a clear understanding of their benefits and potential drawbacks.
In conclusion, the path to financial freedom involves careful planning, discipline, and the right debt reduction strategy tailored to your unique circumstances.
Whether you choose the Debt Snowball, the Debt Avalanche method, or a combination of strategies, the key is to take proactive steps toward reducing and eventually eliminating your debt, ultimately achieving your financial goals and peace of mind.
Please read our Legal Disclaimer.
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