When you think about the power of an avalanche versus the power of a snowball, which one is greater? The clear winner is the avalanche. So, why would you try the Debt Snowball Method when you can use the Debt Avalanche Method instead to wipe out your debt? Which debt repayment method do you think will be more powerful and helpful? It’s really a no-brainer!
Today we are going to discuss the Debt Avalanche Method. With the Debt Avalanche Repayment Method, you will pay off your debt faster and pay less interest to the lenders and creditors, thereby saving you more money in the end.
Here’s the definition of the Debt Avalanche Method from Investopedia – “A debt avalanche is a type of accelerated debt payoff plan. Specifically, a debtor allocates enough money to make the minimum payment on each debt, then devotes any remaining debt-repayment funds to the debt with the highest interest rate. Using the debt avalanche method, once the debt with the highest interest rate is entirely paid off, the extra repayment funds go toward the next highest interest-bearing loan. This method continues until all the debts are paid off.”
Most financial experts agree that when attempting to pay off your debt, you should aim to eliminate the credit card or loan with the highest interest rate first. That is the basic premise of the Debt Avalanche repayment method. Let’s take a closer look at this debt reduction technique!
Who Could Benefit from using the Debt Avalanche Method?
The simple answer is ANYONE! While the Debt Snowball Method is best for anyone who wants to get fast results when paying off their debt (instant gratification kind of people); the Debt Avalanche method is best for people who want to save time, and most importantly save more money (goal-getter patient kind of people).
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Looking at it mathematically, the Debt Avalanche Method is always going to cost you less than the Debt Snowball Method ever would. However, the time and money that you could save does no good if you can’t maintain the enthusiasm to follow it through to the very end.
The Avalanche method is not for the faint of heart or wishy-washy type of person. It takes true grit, determination, commitment, and willpower to see it through and become debt-free!
How Does the Debt Avalanche Method Work?
Utilizing the Avalanche debt repayment method would mean that you start with the debt that has the HIGHEST Interest Rate first. Your goal is to pay off that high-interest rate debt as quickly as possible. This could be a credit card or a personal loan, whichever debt has the highest rate.
First, start by listing ALL of your debts (in order) from the Highest Interest Rate debt down to the Lowest Interest Rate debt. After that, total up the minimum payments you are currently making on all of your obligations to see exactly how much money you are paying out each month.
Next, you will continue paying the minimum balance on everything except for the debt that has the Highest Interest Rate. You would take that debt and try to add more money to that monthly payment (this part is the same for the Debt Snowball method). Paying more than the minimum on this debt will help you pay off the balance quicker, and you’ll be saving yourself money because you are destroying that interest!
For example, if you have a credit card that has a balance of $3,000 with an interest rate of 17.99% (we’ll call this Card A), and another credit card with a balance of $400 and an interest rate of 8.99% (Card B); you would tackle Card A’s balance FIRST because of the very high interest rate. You would pay no attention to the actual balance amount, just the Interest rates.
Keep this methodology going and put more money towards the highest interest rate debt, while still paying the minimum amount due on all of the other debts.
Then, once you have paid off the entire balance on the debt with the highest interest rate, the Debt Avalanche truly begins. Now, you will add that $150 monthly payment (or whatever amount you were paying) to the next debt in line (the 2nd highest interest rate debt) and begin to pay off that debt as quickly as possible.
You don’t save that $150 payment or go out and celebrate with a fancy dinner. No, you take that extra money that you would have been paying, and you apply it to the monthly payment on the new debt that you’re trying to eliminate. And so on and so forth, until ALL of your debt is destroyed!
If you would like to do a comparison of the Debt Avalanche method versus the Debt Snowball method to see how much you can save by utilizing the Avalanche technique, use this free calculator to see the results: http://unbury.me/
What Happens Next?
The “Avalanche” effect will keep rolling until all of your debts are paid off. You won’t see instant results because it could be a few months before you pay off that high-interest debt, but stick with it and realize that mathematically the Debt Avalanche method makes more sense, and you will save time and money in the end.
If you think you will get frustrated and give up if you do not see instant results, then you might want to try the debt snowball method instead. It’s not about how to pay off the debt in the most efficient way; it’s about paying off the debt in a way that brings fast results. It gives you psychological support, which can boost your overall outlook about your debt.
If you have questions about The Debt Avalanche Method or you need assistance with paying off your unsecured debt, contact us today! You can call us toll-free at 1-866-699-2227 or visit our website at www.advantageccs.org