One of the most popular ways of paying off debt is the Debt Avalanche Method. Many people are staunch advocates of the debt avalanche method and believe that mathematically it is the most efficient way that you can pay off your personal debt. Other people believe that there are better methods such as the Debt Snowball method. But in my opinion, there is no one size fits all method to paying off your debt. You should take a thorough look at what method(s) will work best for you before choosing one.
The idea behind the debt avalanche method is fairly straight forward. The general steps to it are as follows:
1) List all of your debt accounts on a piece of paper or in a spreadsheet with their balance, interest rates, monthly payment date and minimum payment amount in a column next to them. This includes credit cards, car loans, student loans, personal loans, home loans and any other debts that you have.
2) Order these debts from highest to lowest in terms of their interest rate. Do not worry about the balance on each of the debts (this to me is one of the major flaws, because a debt of $10,000 at 6% will generate more interest than a debt of $5000 at 8%. There is a simple interest calculator here to check yourself).
3) Pay all of the debts on your list each month at their minimum payment amount except for the item at the top of your list. Pay as much extra as you can to this debt each month until the debt is completely paid off. Make sure that all of your spare money is going to pay off the item at the top of your list if you are paying off your debt aggressively.
4) Once the first debt is paid off, remove it from the list and do the same to the next item on your list. You will work your way down the list and eliminate the highest interest items first, thus in theory, saving you the most money in the long run.
5) Complete the plan, however long it takes and enjoy being debt free. One thing I would recommend is to put your house loan at the bottom of the list regardless of the interest since it would take so long to pay off, you may never get to the other debts.
That is the debt avalanche method in a nutshell. In my opinion, it is important to take the debt balances into account as well as the interest rates. If you are a math person, you should be able to figure out if it is smarter for you to pay off a higher balance with lower interest first or a lower balance with a higher interest first.
I intend on creating some tools for you all that will make this process as easy as entering your debts in a spreadsheet to see, so keep an eye out for that.
Next, I will get into the Debt Snowball method and why some people think it is far superior to the debt avalanche method. Look forward to hearing your thoughts and personal experiences using either of these methods.
Leave a Reply