Debt Avalanche Method: The Smart Way to Become Debt-Free

The debt avalanche method is one of the smart ways to become debt-free. It strategizes your financial portfolio and your repayment in such a way that the cost of borrowing will be less, and you will become debt-free quickly. Its repayment strategy aims to decrease the interest you pay and shorten the debt tenure. In this way, you will clear all your debts quickly in a smart and strategic way. Before we dive deep into the debt avalanche method, it is important to understand what it is.

What is the Debt Avalanche method?

Let us consider that you have many debts in your financial portfolio. You aim to develop a strategy that allows you to be debt-free with the most effective repayment plan that minimizes interest payments, helping you save money on interest in the long run. Here, the Debt Avalanche method is the one that gives you a perfect framework, which minimizes your interest payments and helps to settle your debt early.

The debt avalanche method helps you settle your high-interest debts initially. You make all minimum monthly payments on all your debts, but you pay an extra amount on high-interest debts. You focus on clearing off the debt with the highest interest rate first, then settle the next debt with the second-highest interest rate, and so on. It prioritizes debts based on higher interest rates.

The debt avalanche method helps you a lot by saving on expensive interest charges in the long run. This is one of the smart ways to optimise the repayment plan and help you become debt-free. Now, let’s understand how the Debt Avalanche method works for your debt portfolio.

Working of the Debt Avalanche method

We are gonna first understand the working and step-by-step procedure of the Debt Avalanche method.

• Compile a list of all your financial obligations.
• Prioritise them from the highest interest rate to the lowest
• Make minimum payments on all debts
• Allocate extra money towards the highest interest rate debt
• Clear and settle the highest interest rate debt
• Apply the same strategy towards the next highest interest rate debt

Let’s understand the working of the Debt Avalanche method with an example

Example: Let’s take an example where you were able to save an amount of $1000 after deducting all your expenses. The current debts in your portfolio are:

• $2000 of credit card with 26% APR(Annual percentage rate)
• Car loan of $10,000 with 10% APR and
• Personal loan of $5000 with 14% APR

Let us assume that you are making monthly installments of $100 to each debt mentioned above.

STEP-1: Compile a list of your debts

STEP-2: Prioritise them from the highest interest rate to the lowest interest rate

STEP-3: Let us assume that you are making minimum monthly payments for each debt of the amount $100.

Remaining amount left(Surplus amount) = $1000- 3x$100 = $1000- $300= $700

STEP-4: Assign the excess $700 to the debt with the highest interest, which is the $2000 credit card at a 26% APR

STEP-5: Pay off the credit card debt with the highest interest rate that totals to $2000.

STEP-6: Once you clear the credit card debt, apply the same strategy to the next highest interest rate debt, that is, a personal loan of $5000 with an APR 14%(second highest interest rate debt)

The same strategy is applied to the personal loan, and once it is cleared, use the extra funds towards the next highest interest rate debt, which is the car loan of $10,000 with an APR 10%.

Below is a debt avalanche calculator that lets you create a debt avalanche table prioritized by interest rate.

This explains the step-by-step procedure for applying the Debt Avalanche Method to your debt portfolio. This method will save you a lot of interest in the long run and will make you debt-free. Now, let’s understand the advantages and disadvantages of the Debt Avalanche Method.

Advantages of the Debt Avalanche Method

The Debt Avalanche method is considered the smart and efficient way of repaying debt. Let’s understand the advantages of the Debt Avalanche Method

• This method helps in saving interest amount in the long run effectively and efficiently.
• It reduces the tenure of the loan, hence you will be able to be debt-free at a quicker rate.
• It optimises your debt portfolio and helps in building a cost-effective and cost-efficient financial portfolio.
• It helps in clearing high-interest-rate debts, which are harmful and slowly kill your portfolio.

Every method, along with its strengths, has some weaknesses. The Debt Avalanche Method also has some disadvantages.

Disadvantages of the Debt Avalanche Method

The disadvantages of the Debt Avalanche Method are:

• It requires time and patience since it prioritizes clearing high-interest debt first, which may take a considerable amount of time.
• It requires strong financial discipline and consistency.
• It does not give satisfaction or motivate you, unlike the Debt Snowfall method, which clears small debts and gives a motivational boost.
• It focuses on high interest rates rather than the high outstanding balance of the debts.

These are the disadvantages of using the Debt Avalanche Method. However, having patience and keeping your focus will yield the best results, even if it takes time.

CONCLUSION

The Debt Avalanche method is the best and smart way to be debt-free and reduce high-interest-rate debts. This helps you save on expensive interest in the long run as it prioritises debts based on high interest rates. Hence, it helps in building and strengthening your financial portfolio. It also minimises the power of compounding as it reduces the tenure of the loan. So, develop your portfolio and manage your money effectively and efficiently by utilising the Debt Avalanche method.

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