You want the most bang for your buck, right? Even when it comes to paying off debt, you’re not interested in spending more than you need to.
What you need is an avalanche.
It’s the popular debt payoff method for those who are more 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.
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 care about paying off individual loans quickly. It’s also great for people who like a mathematical approach, because paying off your highest interest debt first will save you money in interest over the long term.
Debt avalanche isn’t your only option when it comes to paying off debt, though:
- 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 that you can enjoy quick victories and build confidence. Although you save more in interest with debt avalanche, the difference in savings is rarely 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 that savings toward your debt balance. The small amounts can really accumulate over time to help you put a dent in your debt.
How to Use the Debt Avalanche Method
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
Start by listing all your debts. Order them from the highest interest rate to the lowest. You can record them on paper or 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, but some debts you might list include:
- Credit card debt
- Student loans
- Personal loans
- Car loans
- Unpaid medical bills
- Mortgage-related debt
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|
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|
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 a side gig if it’s an option.
Knowing that the sacrifice is temporary can help you cut expenses and work hours you otherwise wouldn’t consider.
3. Put All 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 toward your 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. Since your Mastercard is the debt with the highest interest rate, you’ll add your $300 additional monthly payment to its minimum payment — giving you a total of $500 paid toward the Mastercard each month.
|Debt Account||Original Balance||Interest Rate||Monthly Minimum||You Pay|
You’ll continue making those payments until the card is paid off after 17 months — almost a year and a half later.
This is a clear example of why the debt avalanche method isn’t for people who need quick wins. If after six months you realize that it’s not for you, you can totally 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|
Since you’ve been paying the minimum on this card for 17 months, it doesn’t take long to finish it once you start going hard. 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. This means 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|
Theoretically, after the student loans were paid off, you’d start paying toward your next (and in this case last) debt — the car loan.
But here’s the kicker: The car loan was for less than the student loan, and it had a higher minimum payment.
So the car loan will be paid off in month 31. You’ll then finish off your student loans in month 33.
Debt Avalanche vs. Debt Snowball
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 and the debt avalanche.
Ultimately, you just 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.
How to be Successful With the Debt Avalanche Method
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 offers over the snowball. Don’t stop after one calculation. Continue to plug your numbers into calculators to see how much you’re saving every month. It can be super motivating.
- 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.
Dana Sitar is a former editor at The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.