There are two popular ways to tackle debt: the debt avalanche method and the debt snowball method. Pick the process that works best for your personality, and get after it!
The debt avalanche method is a debt repayment strategy that focuses on paying off debts with the highest interest rates first while making minimum payments on all other debts. Here’s how it works:
- Save a small emergency fund of $1,000, which should be parked in a high-yield savings account. This fund covers minor emergencies that may arise so that you do not need to take on any more debt.
- List Your Debts: Use our debt dashboard to make a list of all your debts, including credit card balances, loans, and other outstanding debts. Arrange them from highest to lowest based on the interest rate charged, regardless of the outstanding balance.
- Minimum Payments: Continue making minimum payments on all your debts to avoid late fees and penalties.
- Allocate Extra Funds: Identify any extra funds in your budget that you can allocate towards debt repayment. Excess money could be from cutting expenses, increasing income, or reallocating funds from non-essential spending categories. Now is a great time to earn more money from multiple income streams!
- Pay Off Highest Interest Debt: Use the extra funds you’ve identified to pay off the debt with the highest interest rate on your list. Focus all your extra debt repayment money on this debt while making minimum payments on the others.
- Snowball Effect: Once the highest-interest debt is zero, take the amount you were paying towards that debt (including the minimum payment) and apply it to the next highest-interest debt on your list. This process creates a “snowball effect” where the amount you put towards each subsequent debt grows more prominent, accelerating your repayment.
- Repeat: Continue this process of paying off each debt one by one, starting with the highest-interest debt and moving down the list. As you pay off each debt, the amount you can put towards the subsequent one increases, helping you progress more quickly toward being debt-free.
- It is essential to build small rewards along the way to stay motivated. Maybe treat yourself to a yoga class, a pumpkin spice latte, or a glass of wine when you hit your goals:)
The debt avalanche method minimizes the total interest paid over time, potentially saving you money compared to other repayment strategies. While it may not provide the immediate psychological wins of the debt snowball method, it can be more cost-effective in the long run, especially if you have debts with high interest rates.
Use our net worth tracker to see your current position and your progress over time. The more aggressively you pay off your debt, the quicker you can move on to investing!
To maximize the debt avalanche method’s effectiveness, it’s essential to stay disciplined and committed. Avoid taking on additional debt and maintain a consistent approach to debt repayment to achieve your financial goals.
