What Is The Debt Avalanche Method And How Does It Work?

If debt has you feeling overwhelmed, you aren’t alone. Millions of Americans struggle with debt, and while it may seem impossible to pay it off once and for all, there are ways to help make the process a little easier.

The debt avalanche method is a debt management strategy that prioritizes paying off obligations with higher interest rates first and working down from there. By saving money in interest, you’ll have more to put toward repayment of the principal balance.

We’ll go over what the avalanche method is, how to use this method to pay off debt, and other debt repayment alternatives to consider.

How The Debt Avalanche Method Works

The debt avalanche method is a strategy for paying down debt to save money on interest. You make the minimum payment on each debt and then put extra funds toward debt with the highest interest rate. Once your highest-interest account is paid off, you start making extra payments on the next highest-interest debt and so on. It may take some time, but once one debt is paid off, the rest will be paid rapidly – like an avalanche.

It may seem impossible to pay off a $8,000 credit card bill with an annual percentage rate (APR) of 26%, but credit card interest compounds daily. This means the credit card issuer will add interest charges each day based on your balance and then use that to determine the interest due each month. You’ll pay less if you settle high-interest debts first.

Using the example above, let’s say you only make the minimum payment every month of $254. It will take 5 years to pay it all back, and you’ll end up paying almost $5,600 in interest alone.

Keep in mind that like any debt repayment strategy, the avalanche method only works with healthy financial discipline. If you continue to work toward your goal and avoid taking on any new debt, you will eventually become debt free.

How To Use The Debt Avalanche Method To Pay Off Debt

Here’s a step-by-step process of using the avalanche method effectively. To maximize the impact of the avalanche method, consider building an emergency fund before starting the process. This helps prevent you from using up your savings or going into debt due to unexpected events.

1. List And Rank All Of Your Debts

First, list and rank all debts. Put the debt with the highest interest rate at the top of the list and the lowest interest rate at the bottom. For example, let’s say you have three loans with different APRs. Here’s how you’d rank each one:

• Credit card A: $1,500 with 26% APR
• Credit card B: $3,000 with 18% APR
• Personal loan: $5,000 with 12% APR

Credit card A has the highest interest rate, so it will be the debt you pay off first, followed by credit card B and then the personal loan. Unlike the snowball method, the amount owed on each loan doesn’t affect the order in which you pay down the debt. The goal of the avalanche method is to save money by paying the least amount of interest possible.

2. Build A Budget

In order to know how much money to put toward debt, you need to build a budget. First, collect all your financial information, including household income, bills, debts and other financial obligations. Next, calculate your total monthly income after taxes and make a list of all monthly expenses. These can be consistent expenses, such as mortgage or rent, and variable expenses that change, such as groceries, entertainment and dining out.

Any money left over should be allocated toward debt repayment; however, you’ll still need to make the minimum payments on all debts. If you have nothing left over, consider cutting unnecessary expenses, such as dining out or subscription plans. Any amount helps, no matter how little.

3. Apply Extra Funds To Highest-Interest Debt And Repeat

Once you have your budget and list of debts, it’s time to put extra funds toward the debt with the highest interest rate at the top of your list. Once the highest-interest debt is eliminated, like paying off a credit card, you’ll roll over that amount and apply it to your next highest-interest debt.

Using the same example above, you’ll start with credit card A. You’ll still need to make the minimum payment on all debt, but you’ll put the most toward credit card A. Let’s say you have $300 per month to put toward debt and for the sake of simplicity, the minimum monthly payment for each loan is $50. This means $150 will go toward minimum monthly payments while $150 will go toward paying credit card A. Once this debt is paid off completely, you’ll put $100 toward minimum monthly payments and $200 toward credit card B and so on. Keep doing this until all debt is paid off.

Debt Avalanche Vs. Debt Snowball

Another popular debt repayment strategy is the debt snowballmethod. Unlike the avalanche method where you pay the debt with the highest interest rate first, you pay more toward the debt with the smallest balance, regardless of interest rate. When that bill is paid off, you move on to the next smallest balance and repeat the process.

The idea behind the debt snowball method is momentum. When you see these smaller debts being paid off in a shorter amount of time, it provides a sense of accomplishment and motivation to continue. Financial discipline is the key to paying off debt for good.

The avalanche method prioritizes paying less interest over the long run, while the snowball method focuses on little wins to help keep you moving forward. If you’re motivated by saving as much money as possible, the avalanche method may be for you. On the other hand, if you need proof of progress to keep moving forward, the debt snowball method may be the better option.

Here are some questions to ask yourself if you’re deciding between debt snowball vs. avalanche:

• What are my financial goals?
• How important is quick progress?
• Can I stay disciplined?
• Am I willing to pay more if it means staying motivated?

Other Alternatives To The Debt Avalanche Method

The avalanche method and debt snowball method aren’t the only debt repayment strategies. Here are some alternatives to consider.

• Debt snowflake method: This strategy involves taking any available small savings and income and immediately putting it toward your debts. Over time, repeated small payments can make a significant impact. You can use this method alone or combine it with the debt snowball and debt avalanche methods.
• Debt consolidation: Debt consolidation is a form of debt refinancing where you take multiple — credit cards, personal loans, etc. — and roll the total amount into a new loan with a single payment. This can help you simplify repayment or reduce your monthly payment with a lower interest rate. You can also refinance for a longer or shorter term to help make payments more manageable.
• Debt management plan: A debt management plan is a program offered by credit counseling agencies. These agencies are typically nonprofit organizations that offer education and assistance to help manage finances. When you meet with a counselor, they’ll review your financial situation and help negotiate with your creditors on your behalf. If you decide to sign up with the agency, you’ll make payments directly to the counseling agency, which then pays your creditors. You may be required to pay an enrollment fee and a monthly fee for each credit account.
• Balance transfer: If you have credit card debt, you could transfer all balances to a card with a lower or 0% introductory interest rate. This can help you save money on interest, but there may be a fee and a potentially higher rate once the introductory period ends.
• Biweekly payments: Instead of making monthly payments, consider making half of your monthly payment every 2 weeks. You’ll end up making 13 payments over a year instead of 12. This can help pay down debt faster.
• Increase your income: Increase your household income stream by taking on a second job or side hustle to repay your debt more quickly. Even just a couple of hours a week can make a difference.
• Sell unwanted household items: Gather unwanted items from around the house and have a garage sale or sell them online through websites like Facebook Marketplace and Craigslist. Any money you make from sales can go toward debt repayment.
• Negotiate with creditors: Contact creditors to negotiate lower interest rates. Let them know why you want a rate reduction and mention anything that can help your case. If you’ve made timely payments and you’ve been a customer for years, they may be more likely to offer a lower rate.
• No-spend challenges: Set periods of time where you commit to only spending money on household essentials. Put all the money you’ve saved toward paying off debt.

The Bottom Line

The debt avalanche method is a great way to help you pay off high-interest debt and save money in the process. You may find that alternative solutions, such as the debt snowball method or debt consolidation, are a better fit depending on your lifestyle and preferences. Whichever method you choose, make sure to address underlying financial habits that landed you in debt in the first place. This could involve major lifestyle changes in order to achieve your financial goals.

Ready to start your journey toward a debt-free life? Sign up for a Rocket Money℠ account to track your budget and focus on your debt management goals.