Debt Avalanche Method: Pros and Cons
With American households owing $17.94 trillion as of Q3 2024 — that’s around $53,000 per person — many U.S. citizens know what it’s like to be in debt. If you’re feeling overwhelmed by your finances and not sure what to do about it, the debt avalanche method could be the answer.
This guide explains how the avalanche method works and how you can use it to tackle your finances, as well as taking a quick look at other popular ways to tackle debt. Are you ready to take a smart approach to debt? Then let’s get started.
Debt Avalanche Method: Pros and Cons
With American households owing $17.94 trillion as of Q3 2024 — that’s around $53,000 per person — many U.S. citizens know what it’s like to be in debt. If you’re feeling overwhelmed by your finances and not sure what to do about it, the debt avalanche method could be the answer.
This guide explains how the avalanche method works and how you can use it to tackle your finances, as well as taking a quick look at other popular ways to tackle debt. Are you ready to take a smart approach to debt? Then let’s get started.
What Is the Debt Avalanche Method?
The debt avalanche method is a way to pay off debt by focusing on the payments with the highest interest rates first, helping you save money on interest over time. You start by listing your debts, highest interest rate to lowest. Then you pay as much as you can on the debt with the highest interest rate, while still paying the minimum amount on your other debts.
By tackling the most expensive debts first, you not only save money on interest but may also get out of debt faster than you would otherwise. You may also find that your finances become easier to handle over time, as the biggest debts are dealt with first.
The method can lead to big savings on interest and help you become debt-free sooner, but it’s not without challenges. You’ll need to be patient, disciplined, and committed to the process. And because paying off those debts with the highest interest rates might take a long time, it can take a while to see results, which might be demotivating for some people.
How the Debt Avalanche Method Works
The debt avalanche method could be helpful if you have several debts with different interest rates. Let's break down how it works:
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First, list all your debts and the interest rate you pay on each. Include personal and student loans, credit cards, medical bills, buy-now-pay-later shopping bills, and any other debts you have that you pay interest on.
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Now arrange your debts by interest rate, highest to lowest.
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Continue to make minimum payments on all your debts. Put any extra money you have toward the debt at the top of your list. For example, if you owe $2,500 on one credit card with a 22.9% interest rate and $5,000 on another with a 15.9% rate, you should pay off the $2,500 debt first.
| Debt | Balance Owed | Interest Rate | Priority |
|---|---|---|---|
| Credit Card A | $2,500 | 22.9% | 1st |
| Credit Card B | $5,000 | 15.9% | 2nd |
Table: Priorities credit card with highest interest rate
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Continue this process, moving the extra money to the next highest interest rate debt once the first is paid off. This creates an “avalanche” effect, helping you knock out each debt one after the other.
It's important to stick with the process, even if it feels slow at first. As you tick off the higher-interest debts, you’ll notice the total amount reducing more quickly.
Advantages and Disadvantages of the Debt Avalanche Method
The avalanche method can help you save on interest and pay off debt faster. It's especially helpful if you have several big debts with high interest and have enough extra income to put toward your top debt.
However, this specific method doesn’t suit everyone. It takes a lot of discipline and patience, and it can take a long time to pay off the first big debt which might make it tempting to give up. Also, it can be difficult to make extra payments if you don’t have much money coming in.
Advantages of Debt Avalanche
The debt avalanche method offers several advantages, including long-term savings on interest and the potential to clear debts faster, making it an effective choice for those seeking financial freedom.
Disadvantages of Debt Avalanche
While the debt avalanche method can save money over time, it requires patience and persistence. Progress can feel slow initially, which may be discouraging for some, and staying committed to the strategy demands a high level of discipline.
| Advantages | Disadvantages |
|---|---|
| Reduces the amount of interest you pay overall. | Takes a while to show results. |
| Paying off large debts first can provide motivation. | Slow progress can be demotivating. |
| May help to pay off debts faster than other methods. | Requires a lot of patience and commitment. |
Table: Advantages and disadvantages of the avalanche method
Understanding Different Ways to Pay Off Debt
Choosing the best way to pay off debt is key to managing your money well. There are several ways to go about it. Let's look at three other popular methods: the debt snowflake, the debt snowball, and debt consolidation. Each method has its own benefits and drawbacks and is suited to different situations. Make sure to explore all the options and choose the one that fits your financial needs.
Debt Snowball
With the debt snowball method, you focus on paying off the smallest debts first, no matter the interest rate. This method gives you quick wins and an immediate sense of progress, which can motivate you to keep going. When you tick off those smaller debts, you'll likely feel more driven to tackle the bigger ones. The snowball method is helpful for all amounts, large and small.
For more info: Check out our article on debt avalanche vs. debt snowball to see how the two compare.
Debt Consolidation
Debt consolidation (link) means combining all your debts into one loan with a lower interest rate. This makes your monthly payments simpler and can reduce the total interest you pay. This method could be helpful if you have lots of debts and you find managing them confusing or difficult. But it's crucial to check the terms of the new loan to make sure it's a better deal overall than paying off the debts individually.
Debt Management (DMP)
With a debt management plan, you pay one monthly payment toward your combined debts. Unlike consolidation, a debt management plan is not a loan — so you won’t pay any extra interest. Usually, it involves contacting a credit counselor and having them go through your finances.
Debt Snowflake
The debt snowflake method is helpful if you don’t owe large amounts of money. It involves regularly putting small amounts of money toward your debts. This could be the change from a purchase or the amount saved after using a discount code when shopping online -- toward your debts. It is difficult to clear big debts this way, but the snowflake method can be helpful in the right circumstances.
Conclusion: Is the Debt Avalanche Method Right for You?
The avalanche method is an effective way to reduce interest payments and can help to pay off what you owe faster. Focusing on debts with the highest interest rates first means you’ll pay less interest overall, and you’ll find the size of your debt reduces significantly over time. However, this method doesn’t work for everyone. It takes patience and perseverance as you’re unlikely to see immediate results.
The best repayment strategy is one that you can stick to consistently. It should match your financial goals and fit into your budget and lifestyle. Think about all these factors to choose the method that will help you become debt-free most effectively.
If you're okay with waiting to see the benefits and don’t need small wins to stay motivated, the avalanche method could work for you. But if you’re someone who struggles to stay motivated without immediate results, the snowball method may suit you better. And if you find managing several debts at once too complicated, consolidation or credit counseling combined with a DMP may be a more helpful choice.
