Debt Avalanche Method | What it is and How to Use it

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Updated: 30th Aug 2020
Written by Kim Pinnelli
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July 25, 2020
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In the first quarter of 2020, total household debt reached $14.3 trillion. With no sight of slowing down, American’s need to pay of their debt responsibly. 

Paying off debt isn’t easy, but with the right method, anyone can do it. You’ve likely heard of the debt avalanche method. It focuses on high-interest rates, helping you minimize your costs while getting out of debt.

It’s not for everyone, but those that use it love it. Let’s see how it works.

What is the Debt Avalanche Method?

The debt avalanche method organizes your debts by interest rate, highest to lowest. You focus on one debt at a time, with the debt with the highest interest rate receiving the most attention first.

As you pay down the highest interest debt, you lower your interest costs. Now rather than paying ridiculous interest costs, you pay down (or off) your principal balance. The debt avalanche method saves you time and money.

Here’s another way to look at it.

Are you paying 19% – 20% on credit card debts? What if you could pay those debts off first? You’d have a 19% – 20% return on your investment.

You can’t match that anywhere in the market. If you invest the money instead, you aren’t setting yourself up for the future if the debts still exist. The high APRS eat at your earnings.

What if instead, you paid off your debts? You’d have more money to invest and create more financial security.

How to Use the Debt Avalanche Method

How to Use the Debt Avalanche Method

Before you do anything, look at your budget. Don’t have one? Create one with a budget-friendly mobile app. A few popular options are the cash envelope method, 50/30/20 budget, and the zero-based budget. They all operate on the same premise – categorize and budget your spending.

If you use the debt avalanche method, you need to know how much money you have for your debts. It goes beyond the minimum payments. The more money you put towards paying off your debt, the faster your avalanche builds momentum.

Here is how it works (step-by-step):

  • Gather your statements for all of your debts, ordering them by interest rate, highest to lowest. Write down the interest rate, balance, and minimum payment.
  • Make the minimum payments on each debt by the due date.
  • Any ‘extra’ money you budgeted, pay toward the first debt in line (the highest APR).
  • Keep doing this until you pay the first debt off in full.
  • Take the money you paid toward the first debt (extra money plus the minimum payment) and apply it toward the next debt in line. This is in addition to the minimum required payment. This starts the avalanche.
  • Keep doing this as you move down the line until you’re debt-free.

If you happen to stop or you lose momentum, pick up right where you left off. There’s no judgment. The more consistent you are, the faster you get out of debt, but it’s not a race.

A Quick Example (How to Pay Off Debt with this strategy)

John created his budget. He found that after paying his essential bills and putting money away in his emergency savings account, he has an ‘extra’ $750 to put toward his debts.

John has the following debts:

  • $3,500 credit card with a 19.9% APR and $90 minimum payment
  • $1,500 credit card with a 15.5% APR and $38 minimum payment
  • $10,500 car loan with a 6.5% APR and $150 payment
  • $3,000 personal loan with a 5% APR and $100 payment

Adding up his minimum payments, John knows that he has $372 in ‘extra’ money to pay toward his debts. He pays the $372 on top of the $90 minimum payment to the $3,500 credit card, paying $462 to the credit card and the minimum payments on all other debts.

John does this for 9 months, the time it takes to pay the $3,500 debt off in full. Next, he takes the $462 and adds it to the $38 minimum payment on the $1,500 credit card paying it off in four months, versus the 56 months paying only the minimum payment would allow. Eventually, John works his way through all the debt, paying off the $3,000 personal loan last.

Why the Debt Avalanche Strategy Works

Does it seem strange to order your debts by APR rather than by balance? In our example above, you’d think the $10,500 debt should come first, but here’s why it doesn’t.

The debt avalanche method focuses on high-interest costs. When creditors create the minimum payment, it covers mostly interest, touching only a small fraction of the principal balance. When you focus on the debt with the highest APR, you pay down the interest charges and the principal balance. As you lower the balance, you decrease the interest you owe. This makes a faster and more significant dent in your debts.

Who is Debt Avalanche Best for?

Let’s be honest – the debt avalanche method isn’t for everyone. If you need quick wins or proof your plan works, this isn’t it. If, however, the following applies, consider it:

  • Young Adults
  • New Families (Just Married! 😊)
  • College Students
  • Retiree’s
  • You dislike paying interest and could stick to a strict budget to pay your interest down
  • You can commit to paying large amounts of ‘extra’ money toward your debts without seeing fast transformations
  • You can keep track of your progress on an app, spreadsheet, or pen and paper to keep you motivated
  • You love seeing your interest charges decrease
  • You think logically rather than emotionally

Advantages:

  • You eliminate high-interest charges first, allowing you to focus on paying back the money you borrowed rather than drowning in interest.
  • It’s logical, especially if paying interest upsets you. Even though you don’t see your debts paid off fast, you save yourself thousands of dollars in interest in the end.
  • It’s easy to use. You don’t need crazy formulas or complex programs. You line up your debts highest to lowest APR and pay what you can to the first debt in line while making minimum payments on the rest.

Disadvantages: 

  • Many people lose motivation when they don’t see quick progress.
  • It takes a lot of dedication. Paying extra money to debt should show fast results, but since you focus on the highest interest debt first, results take a while.

Alternatives to the Debt Avalanche Strategy

Debt Snowball

Unlike the debt avalanche, the debt snowball focuses on your balances. Rather than ordering your debts by APR, you order them by balance, smallest to largest. Using the same principle, budgeting ‘extra money’ for debt payoff, make your minimum payments on all debts except the first debt inline (smallest debt). Once you pay that debt off (there’s your quick win), you move to the next debt. The snowball shows results faster but costs more in interest over the debt’s lifetime.

Debt Snowflake

The debt avalanche and snowball require extra funds. If you don’t have them regularly, try the debt snowflake method. You still choose the debt avalanche or debt snowball, but rather than committing to large monthly payments, you apply any ‘extra’ funds you randomly earn. For example, say you save $25 at the grocery store shopping sales and using coupons. Put that $25 toward your first debt in line. Use the same strategy with store refunds, tax refunds, work bonuses, or money earned from side hustles. It may not be hundreds of dollars or even happen every month, but putting any extra money toward your debt has a cumulative effect.

Is the Debt Avalanche Strategy the Best for Paying off Debt?

The best debt payoff strategy is the one you’ll use. For some, the debt avalanche works, and for others, the debt snowball works better.

Think about your tendencies. Do you need quick wins for emotional stability? Will you lose motivation if you can’t see your progress? If so, the debt snowball is right for you.

If you’re more logical and prefer to shake off the high-interest costs first and can follow the patterns, the debt avalanche makes more financial sense.

If neither option resonates with you, find a method that works for you that’s consistent. Maybe you combine strategies, arranging your debt by APR and balance, so you pay off your lowest balances with the highest interest rates first. Again, those ‘quick wins’ maybe what you need to keep going.

Wrapping Up: Debt Avalanche Method

If you feel like your debt payoff strategies are all over the place, the debt avalanche method puts things back into perspective. When you organize your debts and see the interest charges you pay, you will feel more in control and able to successfully manage your debts.

It requires dedication and planning. When used right, though, it saves consumers thousands of dollars in interest and shaves years off their debts.

Kim Pinnelli
Kim Pinnelli
Kim is a personal finance expert with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been freelance writing for 13 years for a number of large publications. Kim thoroughly enjoys helping people take charge of their personal finances.