Understanding the Debt Avalanche Method
You want the most bang for your buck, right? Even when it comes to paying off debt, you’re likely not interested in spending more than you need to.
What you need is an avalanche.
The debt avalanche method is a popular debt payoff method for those who are interested in optimizing their payments and efforts. We’ll explain how you can use this method to get out from under your own mountain of debt and provide practical tips to make it work for you.
What Is the Debt Avalanche Method?
The debt avalanche method, sometimes referred to as the “debt stacking method,” organizes your debt payments by prioritizing debts with the highest interest rates first.
It’s best for people who don’t necessarily aim to pay off individual loans quickly. It’s also great for people who like a mathematical approach, because paying off your highest interest debts first will save you money on interest over the long term.
How the Debt Avalanche Method Works
The concept may be easy, but the execution is hard. Here’s how you can get the avalanche moving in five simple steps.
1. List All Debts From Highest Interest Rate to Lowest
As a part of many debt repayment strategies, it’s best to start by listing all your debts. Order them from the highest interest rate to the lowest. You can write them down or put them in a spreadsheet, app or debt calculator.
You can use a site like Credit Sesame to see a full list of what you owe and to whom. Some debts you might list include:
- Credit card debt
- Student loans
- Personal loans
- Car loans
- Unpaid medical bills
- Mortgage-related debts
Leave out any debts outside of the statute of limitations. After a certain amount of time has passed (usually at least three years, but it varies by state) creditors can’t sue you for unpaid debt.
Your list might look something like this:
| Debt Account | Balance | Interest Rate |
|---|---|---|
| Mastercard | $7,000 | 24.5% |
| Visa | $2,000 | 18.99% |
| Student loans | $12,000 | 6.5% |
| Car loan | $7,000 | 3.11% |
Now that you know who you owe and how much you owe them, let’s move on to what you owe each month.
2. Determine the Minimum Payment Due on Each Debt
If you used Credit Sesame to figure out your balances, you can also use it to see your minimum payments. But the numbers they provide will be estimates, so you’ll need to visit each of your accounts to get the official monthly minimums you owe.
Add those minimum monthly payments to your list.
| Debt Account | Balance | Interest Rate | Monthly Minimum |
|---|---|---|---|
| Mastercard | $7,000 | 24.5% | $200 |
| Visa | $2,000 | 18.99% | $60 |
| Student loans | $12,000 | 6.5% | $200 |
| Car loan | $7,000 | 3.11% | $240 |
In this example, the minimum payments for all your debts equal $700 per month. That’s a big payment. If you struggle just to make those payments, look at what you can cut from your budget for a little while, or consider picking up extra hours at your job or side gig (if it’s an option).
Knowing that the sacrifice is temporary can help you cut expenses and work extra hours you otherwise wouldn’t consider.
3. Put Extra Toward the Highest Interest Debt
Now that you’ve figured out what you owe and have budgeted in some wiggle room, it’s time to throw that extra funds toward the debt with the highest interest rate.
Let’s say you can put an extra $300 per month toward debt. That would make your total available debt budget $1,000 per month. Because your Mastercard is the debt with the highest interest rate, you’ll add your $300 additional monthly payment to its minimum payment. In total, that gives you a total of $500 paid toward the Mastercard each month.
| Debt Account | Original Balance | Interest Rate | Monthly Minimum | You Pay |
|---|---|---|---|---|
| Mastercard | $7,000 | 24.5% | $200 | $500 |
| Visa | $2,000 | 18.99% | $60 | $60 |
| Student loans | $12,000 | 6.5% | $200 | $200 |
| Car loan | $7,000 | 3.11% | $240 | $240 |
You’ll continue making those payments until the card is paid off, which is approximately 17 months.
This timespan is a clear example of why the debt avalanche method isn’t for people who need quick wins. But, the benefit is that if you realize that it’s not for you after six months, you can always switch to the debt snowball.
4. Once It’s Paid Off, Put Extra Toward Your Next Highest Interest Debt
Now the first debt is paid off, you can add its payment (in this case, $500) to the next highest-interest debt’s minimum payment.
| Debt Account | Approximate Balance | Interest Rate | Monthly Minimum | You Pay |
|---|---|---|---|---|
| Visa | $1,450 | 18.99% | $60 | $560 |
| Student loans | $9,600 | 6.5% | $200 | $200 |
| Car loan | $3,150 | 3.11% | $240 | $240 |
Because you’ve been paying the minimum on the next debt for 17 months, it won’t take a long time to finish paying it off once you get started. It should only take only three months.
5. Repeat Until All Debt Is Gone
By month 21 — almost two years in — you’ll rinse and repeat by adding that $560 to the $200 minimum payment on your student loans. You’ll put a total of $760 toward the student loan debt until it’s paid off.
| Debt Account | Approximate Balance | Interest Rate | Monthly Minimum | You Pay |
|---|---|---|---|---|
| Student loans | $9,150 | 6.5% | $200 | $760 |
| Car loans | $2,450 | 3.11% | $240 | $240 |
Theoretically, after the student loans are paid off, you’ll start paying toward your next (and in this case, last) debt — the car loan.
But, here’s the kicker: The car loan has dropped to less than the student loan over time. And, it has a higher minimum payment.
As a result, the car loan will be paid off in month 31. You’ll finish off your student loans in month 33, just two months later.
Benefits of the Debt Avalanche Method
There are several benefits of using the debt avalanche method. The main thing it does for you is provide a way to cut down on the interest you’ll pay over time. While it might take longer to wipe out your first debt with this method, you’ll also free up a larger amount of money when it’s paid off. So, you’ll be able to rapidly pay down remaining debts after the initial debt or two are eliminated.
The debt avalanche method is not about having a quick win. But because you’re paying minimum payments on everything you owe and only focusing on the largest debt, you may find you knock out some or all of your debts at the same time. Focusing on the largest debt is a good strategy to see that you can tackle large debts and come out ahead — making smaller debts look like no big deal at all.
If you’re still not sold on the avalanche method, consider this: If you start the avalanche method and snowball method at the same time on the same debt, the avalanche method will save you more money in interest and save time on your repayment.
Debt Avalanche vs. Debt Snowball: Which Is Better?
A debt avalanche isn’t your only option when it comes to paying off debt. Here are some other debt payoff methods:
- If you’re motivated by small wins, the debt snowball might be a better fit for you. In this method, you pay off your smallest balances first so you can enjoy quick victories and build confidence. Although you save more in interest with a debt avalanche, the difference in savings is not always a significant amount.
- If you want to save the most money and you have the discipline to manage multiple balance transfers, the debt lasso method involves corralling your high-interest debt into a low-interest one so you can pay down the principal balance more quickly. You can save the most money using this method, but it takes the most effort, as you’ll need to regularly look for offers for the lowest interest rate and monitor promotional periods.
- If you’re not ready to commit to the structure of any of the above methods, you can think much smaller (as in, snowflakes). Using the debt snowflake method, you can capture tiny savings — like the money you save by skipping dessert or by finding an item on sale — and immediately pay those savings toward your debt balance. The small amounts can really accumulate over time to help you put a dent in your debt.
Let’s take a look at the debt avalanche and debt snowball options, two of the most popular. In our example above, we paid off $28,000 in debt and $3,410 in interest.
If we’d used the debt snowball method, we would’ve paid approximately $3,563 to interest. The debt avalanche saved us $153 in interest payments over two years and nine months.
That’s about $5 per month. When you break it down like that, there’s not much difference between using the debt snowball or debt avalanche methods
Ultimately, you have to decide which method is right for you at any given time along your debt-free journey.
This debt payoff planner app will allow you to experiment with your payoff order to see how each would affect your debt balances.
Tips for Implementing the Debt Avalanche Method Effectively
If the debt avalanche sounds right for you, then we have a few tips to help you be successful with it.
Make your own small wins. If you like the idea of the avalanche but know you need the wins that come with the debt snowball, create your own milestones. Use a visual reminder like a bullet journal or chart to record your payoff and celebrate when you get to certain amounts.
Be patient. You can get into debt really quickly, but it takes time to get out. Have patience and persevere through lulls and hard times.
Keep doing the math. If you’re doing the debt avalanche method, then you probably liked seeing the savings it offered over the snowball method. Don’t stop after one calculation. Continue to plug your numbers into calculators to see how much you’re saving every month. Doing this can be motivating.
Takeaways:
- The debt avalanche will save you money because you’re tackling your debt with the highest interest rate first.
- After you finish paying off your balance with the highest interest rate, you move on to your debt with the next-highest interest rate.
- If you need motivation, make a debt payoff chart to celebrate when you’ve paid off certain amounts.
Tools and Resources for the Debt Avalanche Method
The avalanche method can be an excellent way to get ahead of your debt and become debt free. Here are some helpful tools and resources to explore as you decide if this method of debt reduction is right for you:
- Undebt.it Debt Avalanche Calculator
- Calculator.net Debt Payoff Calculator
- Best Budgeting Apps for Couples in 2024
- The 11 Best Budgeting Apps To Get Your Finances Together
- Get a Free Financial Plan From Anasova
- Create a Household Budget in 4 Simple Steps
Dana Sitar is a former editor at The Penny Hoarder.
