In a world where money can buy not necessarily happiness, but freedom from financial stress, many are wondering how they will actually be able to pay off their debts. It is simple to start this process when you apply the Debt Avalanche Method.
What is the debt avalanche method? This technique involves making the minimum payments on all debt, while putting all the focus on paying off the one with the highest interest rate with the remaining money. This method enables you to protect yourself against debt in the future and paying the least amount of interest in the long run.
This is often compared against the snowball method, which we discuss further in a different post. This method came first, and some have abandoned it because it doesn’t give them the instant results they want. The thing is, it still provides them with the fastest results in the long-term.
Looking years ahead, paying off your debt will end sooner with this method than if you were to use the snowball process. This is because interest rates can increase your debt and elongate the time that it takes to pay it off. Rather than putting money towards what matters most, you are paying extra cash just for having debt! With all of the fees that we are already presented with on a consistent basis, it is crucial that we save our money in every way possible.
You might be wondering if this method is even possible for you. When looking at your long list of debt, you might discover that you struggle because your highest interest rate debts are ones with larger sums as well.
If you manage to stick to it and put all your efforts towards destroying these loans with high interest rates, then you will be able to stop paying for simply having loans out. Interest offers no benefit to you, so the sooner that you can stop paying it, the sooner you can start to save more money. Let’s start to get a better understanding of just how this method is going to be able to positively transform your life!
How This Method Works
For this example, we have used very small sums and simple numbers so that anyone can have the ability to understand the true benefits of this concept. Don’t be afraid if your debt is way bigger than this, because it is just an example of someone with a smaller sum compared to others. The goal is to be able to understand this concept at the core, so simple tables such as this are a great way to get a better understanding of how this method actually works.
Let’s imagine that after basic expenses ↔ rent, utilities, food, and transportation, someone has $1,000 leftover to pay off debts and do whatever they want with. As you can see in this chart below, that would leave them with around $525 after making the minimum payment on each of these loans. That’s plenty of money to have a lot of fun with! You can go on a small trip, eat out frequently, go to the movies, order takeout, go shopping, and so on. However, by using the Avalanche Method, you would be able to pay your debt off in half the time we have listed below.
| Total Amount | Interest Rate | Minimum Payment | Time to Pay Off | |
| Student Loan | $20,000 | 4% | $250 | 10 years |
| Credit Card | $5,000 | 2% | $200 | 2.5 years |
| Second Credit Card | $1,000 | 5% | $25 | 4 years |
When using the debt avalanche method, you would pick the one that has the highest interest rate and start with this debt. As you can see, this is the second credit card. It is a low amount, which helps too. Rather than going out for those extra days, you would instead save every last penny, and probably try to squeeze more out of the rest of your budget as well. Even if you took $300 out of that extra cash, you would be able to have the second credit card debt paid off in four months.
The next step would then involve you continuing your other minimum payments, and tackling the student loan next, since this has the next highest interest rate. If you took $300 extra on top of that student loan, you would be able to pay it off in around four years instead of 10. This could save you $4,800 in interest. That’s an intense amount, and the same price that you would be able to pay off the credit card loan for!
As you can see, this method is going to be incredibly beneficial to saving you massive amounts on interest rates. If your debt was the chart above, then this would mean that you have a total of $26,000 in loans before interest. After the minimum payments, you will have paid over $8,000 in interest. That is more than your lowest two debts combined. There is no reason that anyone should have to be paying these high prices just because they can’t afford to pay it off faster!
To put interest into perspective a little further, remember numbers like these:
- A $10,000 loan with a %5 annual interest rate paid in 10 years would accrue $5,000. That’s such a small percentage, but it ends up being half the debt in the end! This isn’t even considering the interest if given on the total sum rather than the initial value, so it would be even more.
Having to pay the debt of money that you have already spent is always hard. You look ahead at future paychecks and become excited, but you are always reminded of the debt that you still have to pay. Not only is this a frustrating process, but we actually have to pay even more for having that debt out as interest increases! It is easy to sign up for debt, thinking that you are able to quickly pay it off before too much interest accrues. Before you know it, you are in over your head and you feel strangled by all of the interest piling up around you.
This method will help you better gain control over your debts. It will enable you to stop having to pay so much extra in interest. After paying off debts in small amounts, it can feel like it never ends because high interest rates bring that sum right back up to where it was in the first place. Don’t let yourself feel weighed down by your interest rates anymore. Let’s take it a bit further and discover more ways in which you can find help from this method of debt removal.
A Quick and Efficient Way to Become Debt-Free
This is a great method because it is one that is going to help you build momentum. After you have finished paying off the loan with the highest interest rate, then you move down to the next loan. What happens in this process is that you are taking that previous loan and allowing yourself even more money to go towards the debt because you have eliminated that minimum payment. By getting rid of one debt at a time, you build the amount of money you have to go for paying things off because you are taking away minimum payments left and right.
Eventually, you will only have a couple of monthly payments to make, and you will be able to see the results much easier. This is a process that will take you a little while in order to see real significant results. Some individuals don’t like this method because it doesn’t give them that instant satisfaction that starting with small debts and paying off form there could have. Rather than enabling yourself to cross things off the list one at a time, you are putting money towards randomized sums throughout your time paying things off because you are basing everything off of interest loans.
This method can be optimized when you are able to pay off multiple debts at once. This means that you might make the minimum payments and save up enough to pay off two of the highest interest loans at once. When it comes to really small debts, you might skip over these and go onto one that has a larger sum. For example, a $500 loan with a %5.1 interest loan won’t gain as much as a $10,000 loan with a 4.8% interest loan, so you should still consider what it is that is going to save you the most money in interest. If you compare the interest to the original loan, of course, the $500 is going to have a higher percent, but it will be less money out of your pocket than the total sum of the interest from the larger loan.
There is some room with this method. You don’t have to go strictly down the line if it means that you won’t be paying off the most interest in the end. If you really want to get mathematical, you can order your loans in amount and interest accrued in order to get the best chance possible of saving money. What matters most is that you are building momentum. You can pay your smallest amounts and get that done easily, but you might be in debt for five years longer! The sooner you can make your way out of debt, the better.
Remember that this is going to be a huge mental job as well. Your mindset will really help to determine the level of success you might be gaining throughout the process. You will have to learn how to say “no” frequently to things that you might want. You will have to start to really value a dollar and understand how much it means going towards your interest. Sometimes you might not be able to pay off an entire loan for a year, and this could be discouraging. You might become saddened that you have to wait so long to see results, deciding to go back to old habits of spending. If you are a strong-willed person and want to save the most money possible, you have it in you to ensure that you are going to be saving as much money as possible.
The Positives and Negatives of This Method
Of course, like all methods of personal finance, there are some negative aspects to this method. Let’s take a look at these first and then discover all of the benefits that you will discover. The biggest negative is that this can be a motivation killer. You might not be able to see any results at all within the first couple years of this method if you are planning on paying off debt for the next few years. This can be a quick confidence killer and make you feel as though you don’t want to continue on. If we aren’t motivated to keep going with our debt pay-off plans, we can find ourselves struggling again just as we were when we gained the debt.
However, this is really the greatest negative of this method. Yes, it is hard to stay motivated when you don’t see any results, but if you are self-disciplined and willing to put in the work, then the results will come faster than you might have initially imagined.
The best thing about this method is that it helps you to change the way that you see debt. Rather than getting scared by the initial numbers that you see sitting in front of you, you are instead focused on what this money actually means in the long-run. You aren’t just seeing the big scary amounts that are listed. Instead, you are looking at the practical way that money is going to consume you throughout the near future. The better you enable yourself to reframe your mind, the easier it will be to stay positive.
You are also using motivation to help ensure that you aren’t accruing anymore debt. Some of the reasons that we start to gain so much debt in the first place is because we aren’t thinking about it for what it really is. Rather than understanding that we have to pay this off one day, and even more, we think we can just worry about it later. There is always the element of believing that we will just get magically wealthy as time goes on as well. We take debt out thinking that we will be able to easily pay it off one day, not actually understanding that we won’t make as much money as quickly as we think.
When we start to put the attention towards ensuring that we pay off our interest, it reminds us that we don’t want to have to pay more for things than we already are. We are looking out for ourselves in the future, and that is something that we really need to learn how to do since taking out more loans was a time when we completely disregarded our future self.
If you want to avoid the risk of making yourself feel like you aren’t seeing positive benefits, then remember that you can always set smaller goals for yourself. If your biggest interest rate is on a $10,000 loan, then make your small milestones be paying off $1,000 or $2,500 at the time. Remind yourself just how much you are saving on even those smaller amounts from interest and that will remind you just how important it is that you keep moving forward!
Tips to Save Money Monthly
The avalanche method is going to be all about making sure that your money is going towards paying off interest. This is an amount borrowed, and you want to give that back as soon as possible so that you don’t have to pay any more than you already are.
One of the best methods is to consider the interest taken out of a dollar spent now that could be a dollar later on. For example, $100 on a $5,000 loan seems small. After a year, if the interest rate is 15%, then that $5,000 loan gains $750. If you put $100 towards that for a year, then that reduces to $3,800. The added interest would be $180. Multiply that by however many years it would take to pay that off, and you can see that your $100 will take you much farther towards that loan in this moment than it would towards a purchase you’ll forget about.
Always look for the smallest ways to cut down. Even if it is something as simple as switching from name brand to store brand products. This can save you a ton of money in the long-term, and that is the mindset that we are trying to elicit in this process. The easier you can enable yourself to really pinch pennies, the more you have to pay off your ever-increasing student loans.
Consider if this product or service that you are buying in the moment is going to mean as much to you in five years as being debt free might. If you are able to eliminate your debt in a short amount of time, what might your life look like then? How much extra money will you have to spend in the future?
Think of it this way. Take the time that it would take for you to pay off your debt if you started with the avalanche method now. Maybe you discover that this ends up being 15 years from now on its own, but with the avalanche method, you could cut it down to 7 years. Seven years ago, what might have life looked like if you were debt free? It can seem so far away, yet so close. You might have financial regrets you wish you could take back.
Let this moment be that time you decide to transform your life. Prepare for a better future in seven years than you did previously, because you deserve it. Don’t wait around for things to get better in seven years, because that is what you did seven years ago! Did things get better or go as you had expected them to? Take charge over your life now so that you never have to worry about being suffocated by high interest rates again. Be the master of your finances and free yourself from the endless restraints of companies charging you for not having enough money. It is called personal finance, so keep it personal and remember that this is something you deserve!
Related Questions
Don’t worry if you don’t fully understand these concepts quite yet. We have a few commonly asked questions that can help you ensure that you are making the best decision overall for your personal finance.
Who does this method work best for?
This method is one that is going to work best for any individuals that are willing to wait a little bit in order to see a significant drop in your overall debt in the long-term. It is good for those who have multiple small loans that are around the same amount. It won’t work best for those that just have a couple low-interest loans.
What if my highest interest rate loans are also the highest sum?
This is an even better reason to start to incorporate this method into your life. If you have high sum loans with high interest rates, these should gain your attention because they will accrue the highest amount of added debt. It might take longer to see a drop in your overall debt, but it will be worth it in the long-run.
Is this the best method to pay off debt?
This is for the individual to determine based on their own personal finance. The best method is one that is going to actually work for you because it is easy to stick to, and because it will save you the most money. Depending on your situation, the avalanche method can do just that for you.