Debt Avalanche

The term “Debt Avalanche” refers to a person’s theoretical ability to pay off his or her credit card debt every month in such a way that the outstanding balance of these debts will be paid off in a speedy, timely way with minimal interest payments to financial institutions (usually by beginning to pay off the largest of one’s debts first and then paying off the smaller ones, hence the down-the-mountain avalanche effect). In order to correctly calculate one’s debt avalanche, only the separate interest rates for the person’s individual credit card debts are required. However, if each credit card debt has a different tax liability, one must first figure out one’s rate of interest after one’s taxes. Debt avalanche is in contrast to its rival method called “Debt Snowball”, in which one pays the smallest debts first and then works on paying off the larger ones.

Process

The process of debt avalanche involves a few easy steps. Step one: look at your debt accounts and list them from biggest interest rate to the lowest. Usually credit cards will have the highest rate of interest, and remember that even though your credit may improve over time, your interest rates associated with the cards will not lower. Next on the list is a home mortgage or home equity loan. Following that will likely be any student loans you may have accrued. Also be aware that with the debt avalanche method, only your interest rates are taken into consideration, not any outstanding balances. Step two: Make sure you pay your minimum payments required on all debts each month. It may be wise to create a spreadsheet to keep track of all your monthly debts and the minimum payments associated with each account. So, on your spreadsheet (such as Excel) simply add a column beside every debt account that indicates the minimum monthly payment. Also in your spreadsheet, add a column indicating the due date of the minimum monthly payment, especially if the date tends to stay the same each month. As a tip here, try to make your monthly payments before they’re due, and if you pay weeks prior your interest paid could actually be reduced. For step three: whichever of your debt accounts has the largest interest payment, put all available monies toward that account. Thus, after your life expenses are paid for on any given month, try to put any extra cash into paying down the account with the biggest rate of interest. For the final step, step four, simply repeat the above three steps every single month. The debt avalanche method ensures that not only are you making sure your minimum monthly payments are made, but also that you are slowly yet methodically attacking your largest debt account. Furthermore, once one of your accounts has been paid off, and hopefully it is your largest (although not necessary), take that account off of your spreadsheet, and then reorder your list if you find that rates of interest have altered.

Benefits

There are a few good benefits to using the debt avalanche method of paying off your debts. For example, one benefit is that this method saves you money. This is likely the largest benefit of this method, in terms of the ability you have to pay off debts while at the same time be owing much less interest, as opposed to using other debt reduction methods such as the debt snowball. Thus, according to the mathematics of the avalanche method, if this method is employed, you would be debt-free quickly and cheaply.

Another benefit of the debt avalanche method is being able to see large results. Although one big detraction with the avalanche approach is that it takes a long time to see results in your debt reduction progress, you are actually chipping away at your biggest debts first and foremost. Thus, even though attempting to pay off those big loans can feel like a daunting task, tackling them can give you great motivation to push onward, with the smaller debts seeming to be insignificant as you move forward.

Conclusion

Regardless of how you choose to pay off your financial debts, the main point is to figure out a good plan, such as debt avalanche, and stick with that plan. So, if you choose the debt avalanche method, simply keep in mind that when the day comes that you’ve finally made that last payment on your credit cards, it will surely be an extremely rewarding moment worthy of celebration! And because you endured the situation, you will be wiser to the pitfalls, as well as gains, of using credit cards, reinforced by the knowledge of never again wanting to feel the sting of paying unnecessarily high interest rates.