Managing multiple debts can feel overwhelming, especially when deciding where to start. Should you tackle the smallest balance or the one with the highest interest rate? The avalanche method offers a smart solution by prioritizing high-interest balances.
This approach helps prevent interest fees from accumulating, allowing you to take control, save money, and pay off debt faster. By addressing the most expensive debt first, you create a more efficient path to becoming debt-free.
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What is the avalanche method?
“The avalanche method involves paying off debts with the highest interest rates first while making minimum payments on the others,” says Nischay Rawal, a certified public accountant at NR Tax & Consulting. “This method helps minimize overall interest payments over time.”
By using the avalanche method to pay off debt, you save on interest costs and accelerate the debt repayment process, helping you reach financial freedom faster.
How it works:
- List all your debts from the highest to the lowest interest rate.
- Allocate any extra money you can afford to the debt with the highest interest rate, while making minimum payments on others.
- Once the highest-interest debt is paid off, move on to the next one and repeat the process.
For example, let’s say you have the following debts:
- Credit card debt: $3,500 at 22% interest
- Personal loan: $8,000 at 10% interest
- Medical bills: $1,500 at 18% interest
Using the avalanche method, you would focus on paying off the credit card debt first because it has the highest interest rate. After that, tackle the medical bills, then the personal loan.
Avalanche method: Pros vs cons
When it comes to managing debt, the avalanche method has its own unique upsides and challenges. This approach can be especially appealing if you’re focused on the numbers and want to cut down on interest as fast as possible. But this strategy isn’t right for everyone—if you’re someone who needs quick wins to stay motivated, it might feel like a bit of a slog at first.
Pros
- Save money on interest: Paying off high-interest debts first can significantly reduce the overall interest you pay.
- Accelerate debt repayment: Eliminating the most expensive debts quickly speeds up the entire process.
- Mathematically efficient: This approach is driven by logic, helping you focus on the most cost-effective way to pay down debt.
- Build momentum: Clearing your highest-interest debts frees up more money to apply to other debts, creating a snowball effect that accelerates repayment.
Cons
- Less visible progress: Clearing high-interest debts first may not feel like progress if you still have a lot of small balances left.
- Requires discipline: Sticking to this method may be tough for those who prefer the psychological boost of clearing smaller debts first.
- Offers fewer motivational boosts: Unlike the snowball method, which involves paying off the smallest debts first to create quick wins and build momentum, the avalanche method might not feel as rewarding in the early stages.
Snowball vs. avalanche method
The debt avalanche approach prioritizes high-interest debts first, meaning you tackle the most expensive balances regardless of the balance size. This strategy ultimately saves you more money over time, as it minimizes the overall interest you pay. “However, it might take longer to see progress, which can be discouraging for some,” Rawal says.
On the other hand, the debt snowball method focuses on paying off the smallest balances first, regardless of their interest rates. By clearing small debts quickly, this method typically provides more frequent motivational boosts, offering a sense of progress that can keep you motivated as you build momentum.
The choice between these methods depends largely on your financial goals and personal preferences.
When to use the debt avalanche method
“The avalanche method is most effective when dealing with high-interest debt, which can otherwise become unmanageable,” Rawal says. “People should also consider it if they’re disciplined and eager to minimize interest costs.”
Here are some scenarios where this method works particularly well:
- You have high-interest debts. Credit cards and payday loans typically come with high-interest rates. The avalanche method minimizes the interest you pay.
- You’re focused on long-term savings. If you aim to pay off debt quickly while saving money, the avalanche method is ideal for you.
- You can stay disciplined and patient. If you're OK with slower visible progress at the beginning and prefer bigger gains in the long run, this method might be a good choice.
- You can make extra payments. The method works best when you can consistently make extra payments toward your highest-interest debts.
- You prefer a logical approach. If you value a clear, efficient strategy with a focus on saving money, the avalanche method can be a great fit.
Still not sure? Bonus tips to help you decide if it’s the right choice for you
- Assess your interest rates. The avalanche method is most effective for high-interest debts. Compare rates and prioritize savings on interest.
- Consider your personality. If you prefer quick wins, the snowball method might be better. For long-term savings, the avalanche method is typically a better fit.
- Evaluate extra payments. The avalanche method works best if you can make extra payments toward high-interest debts.
- Consult a professional. If you're unsure, a financial advisor can provide personalized guidance based on your situation.
Bottom line
The debt avalanche method is an efficient way to minimize interest and become debt-free faster, but it requires discipline and patience. If you’re ready to make a long-term commitment to eliminating your debts, this strategy could be the right fit. However, if you need faster emotional rewards, the snowball method might suit you better. Evaluate your situation and choose the path that aligns best with your financial goals.