summarize In a Nutshell.
The debt Avalanche method focuses on eliminating your high interest balances or your most costly debt as quickly as possible.
The Debt Avalanche is known as a more efficient, cost-effective, and often faster way to get out of debt than other approaches to debt reduction. If you need short-term victories to inspire you, you’re a debt snowball candidate. If you tend to be analytical and patient, a debt avalanche may appeal to you.
What is the Debt Avalanche Method?
In the Debt Avalanche method, you pay as much as possible towards your high-interest debt while making minimum payments on the rest, until all the debt is paid off. If your high-interest debt is weighing you down, this could be a good solution to becoming debt-free.
The debt avalanche targets debts with the highest interest rates first. This route may help you save time and interest over your debt payoff journey.
How to Use the Debt Avalanche Method?
So here are the few steps to be considered while using the Debt Avalanche method:
1: List all your Debts from Higher to Lower Interest Rates.
Make a list of all the debts you have. Now arrange them from the one having a higher interest rate to the one having a lower interest rate. It could include Medical bills, Credit cards, Personal loans, Auto loans, and Student loans.
Using a spreadsheet will help this process a lot. You can use Microsoft Excel or Google Sheets.
2: Make a Budget.
First, you’ll want to make more than the minimum payment on your account with the highest interest rate. So it’s helpful to create a budget to see how much more you can pay off your debt each month, especially since every little extra can help speed up your repayments.
3: Pay off Debt Having a Higher Interest Rate.
Now all you have to do is review the budget and see how much money can you put toward the loan while still being able to make some payments on the rest of the debts.
4: Increase Your Extra Payments as You Pay off Your Debts.
It will take some time for you to feel like you’re making some progress, especially if the debt that has the highest interest rate also has a high balance. But you should keep going thinking that the math is on your side.
Example
| Account Type | Monthly Payment | Interest rate | Balance |
| Credit Card A | $100 | 24% | $3,000 |
| Credit Card B | $130 | 16% | $4,000 |
| Student Loan | $122 | 4% | $9,000 |
| Car Loan | $218 | 3% | $7,500 |
| Medical Bill | $125 | 0% | $1,500 |
| Total Minimium Due | $695 |
In this example, the first credit card has the highest interest rate. So any additional money will go to that invoice first until it is paid. And you’ll continue to make the minimum monthly payment on all other loans in the meantime. Once the first card is paid off, you can focus on the second credit card.
Once both credit cards are paid off, you move on to student loans, car loans, and then medical bills. Throughout this process, make sure to make the minimum payment on time for the remainder of your loan to avoid late fees or impact on your credit score.
Other Ways to Reduce Debt
1: Debt Snowball
The Debt Snowball method is the method that excludes your mortgage. It focuses on paying off your smallest debt balances first while making minimum payments on all other debts.
Once the balance is paid off, you take the funds you had previously allocated to your smallest debt and put them towards your next smallest balance, essentially building, or “snowballing,” your repayment toward the next balance. This cycle repeats until all of your debt is repaid.
2: Debt Consolidation
Debt consolidation can be a good option if you have multiple types of debt. Using a personal loan can help pay off outstanding debts and simplify payments, helping you manage fewer deadlines and payments.
This can be a good option if you can get a lower interest rate than you are paying.
3: Balance Transfer
Balance transfers can allow you to transfer outstanding debt from one or more accounts to a new or different credit card. It can help you consolidate your credit card debt or get a lower interest rate, which can help you pay off your debt faster.
Just make sure to review all terms and conditions before signing up, especially as there may be fees associated with balance transfers. Also, you’ll want to check the interest you may have to pay after the introductory interest rate ends.
And don’t forget that canceling your old card can affect your credit score.