Debt Avalanche Method

What is the Debt Avalanche Method?

The Debt Avalanche Method is a strategic approach to debt repayment that prioritizes paying off debts with the highest interest rates first, gradually working down to lower-interest debts. This method minimizes the total interest paid over time, ultimately helping you become debt-free more efficiently.

How the Debt Avalanche Method Works

The debt avalanche is a repayment method that focuses on repaying the highest-interest debt first. Once you’ve paid the balance of the highest-interest card, you move on to the second-highest-interest card, and so on.

  1. List Debts by Interest Rate: List all your debts in descending order based on their rates, with the highest-interest debt at the top and the lowest at the bottom.
  2. Focus on Highest-Interest Debt: Direct any extra funds towards paying off the debt with the highest interest rate while making minimum payments on all other debts.
  3. Cascade Payments: Once the highest-interest debt is paid off, apply the total amount you paid towards that debt (including minimum payments and any extra funds) to the next highest-interest debt. Continue this process until all debts are paid off.

Here’s an example to illustrate:

Debt Balance ($) Interest Rate (%) Minimum Payment ($)
Debt 1 $5,000 20.99 $89
Debt 2 $6,300 14.99 $121
Debt 3 $500 9.99 $20
  • Start by paying as much as possible towards Debt #1 ($5,000) while making minimum payments on Debt #2 and #3.
  • Once Debt #1 is paid off, apply the $89 minimum payment from Debt #1 to the minimum payment of Debt #2, making it $210 ($121 + $89).
  • Continue paying the minimum on Debt #3 while aggressively paying off Debt #2.
  • Once Debt #2 is paid off, apply the combined payments from Debts #1, #2, and #3 ($89 + $121 + $20) to Debt #3.

By following this method and systematically targeting debts with the highest interest rates, you’ll minimize the total interest paid and accelerate your journey toward becoming debt-free.

This method makes the most mathematical sense since you are focused on eliminating debt with the highest interest rate, thus lowering its cost. However, math aside, your motivations might require a different method, such as debt snowball.

Learn about the Debt Snowball Method.

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