CRASH COURSE: Debt Avalanche 101
Can you name someone in your life who follows Dave Ramsey and his Baby Steps? I bet you can. Dave Ramsey teaches and preaches the Debt Snowball method, however there is another well-known option for paying off debt, known as the Debt Avalanche. While the Debt Snowball focuses on paying off debt from smallest balance to largest, the Debt Avalanche focuses on paying off debt from the largest interest rate to the smallest. This means you will be saving money in the long run by paying off those debts that are accumulating the greatest amount of interest! Pretty awesome, right? You're probably thinking… how do I know if this payoff method is right for me?
Who Could Benefit from the Debt Avalanche Method?
Someone who is confident in their ability to stay motivated on their debt freedom journey → you may be paying off some larger debts first, meaning you may not see results super quick!
Someone who is a rational thinker and motivated by the knowledge that they're saving money in the long run → you’ll be saving on interest which is a perk you don’t get with the debt snowball!
How To Set Up Your Debt Avalanche
Sound like you?! Here’s how to get started:
Create a list of your debt. Include the title, balance, and interest rate.
Federal Loan 1 - $10,000.00 - 3.8%
Federal Loan 2 - $5,000.00 - 6.5%
Private Loan 1 - $3,000.00 - 3.0%
From 1-however many loans you have, rank them in order of largest interest rate to smallest interest rate. This is how you’ll know the order in which you’ll pay off your debt.
Federal Loan 2 - $5,000.00 - 6.5% #1
Federal Loan 1 - $10,000.00 - 3.8% #2
Private Loan 1 - $3,000.00 - 3.0% #3
Create a budget.
Search through your budget and see where you can decrease your spending (Can you cook at home instead of eating out 4 times a week?). This is where you will find the “extra” money in your budget!
When it’s time to make the minimum payments on your loans, make the minimum payments on all loans except the one that you ranked #1 (meaning it has the highest interest rate).
On the loan ranked #1, you’ll pay the minimum payment PLUS any “extra” money you found in your budget! This will help you pay the loan down faster. You’ll keep doing this each month until the loan is gone!
Move onto the loan with the 2nd highest interest rate, and then continue down the list as you pay them off!
If you’ve used the Debt Avalanche Method, have you stuck with it? Why or why not?