Debt Avalanche
Quality Verified
Updated: November 8, 2023
Quality Verified
Updated: November 8, 2023
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What Is the Debt Avalanche Method?
Debt reduction strategies have become integral for sound financial management. A primary objection is to not only pay off debts entirely and limit additional accrued interest, but to do so in a timely manner. The debt avalanche method is a good solution: where you pay on your accounts with the highest interest rate and work your way to the lowest.
Debt avalanche is the same as the stacking method and debt ladder. It’s an ideal approach to avoid paying more interest in the long-term. Understanding the types of debt you have and various debt management strategies can help you immediately begin decreasing your debt and improve your finances and overall well-being.
Understanding Debt Avalanche
Juggling debts can be daunting and financial stress can impact your mental health— feeling overwhelmed, anxious and not certain of where to begin. One of the primary difficulties with debt is that it accrues interest over time. The longer you don’t implement a debt reduction plan, the larger your financial obligations become.
If you want an approach that helps you save on interest, debt avalanche may be a good fit. Starting is simple: review your debts and identify the one with the highest interest rate. That’s your priority. Now, it doesn’t mean that you stop paying attention to everything else. You’ll still pay the monthly minimum for all your financial obligations. However, now you can add any extra monthly income you have to the debt with the highest interest.
Debt avalanche is a popular accelerated debt repayment strategy. As the name implies, it’s a strategy to help you pay off your debt faster. It’s important to review your loan documents carefully, too. Some lenders prohibit early payoff methods and doing so could result in penalties.
How to Apply Debt Avalanche
The debt avalanche method is a popular choice because it’s easy to apply and doesn’t require assistance from a financial expert. You can start by working your way through the six steps detailed below.
Calculate your monthly disposable income
After you’ve paid your essential expenses — food, rent, utilities, etc. — how much money is remaining? This is your disposable income which can be used for debt repayment.
List your existing debts
Create a list of all your debts, no matter how small they may be. When you have noted everything, arrange them according to their interest rates. Your disposable income should be applied to the loan with the highest rate.
Review your monthly minimums
Your debts have payment deadlines and monthly expenses. Review these details and add them to your list of debts.
Assess your leftover funds
Once you’ve paid your monthly expenses, assess how much of your disposable income is left. This amount can be used as an additional payment for your debt with the highest interest.
Pay the first debt in full
Repeat the process above each month until you've paid the debt with the highest interest in full. You can then use the amount you used to pay as an additional payment for the loan with the second-highest interest rate.
Repeat the process
Continue this process until you’ve paid off your second debt in full. You will keep working this same process until you’ve paid off your debt with the lowest interest rate and have paid your debts off completely.
While the debt avalanche method is simple in concept, it’s a good idea to examine how it might apply to a specific situation. Doing so can help you determine if this process is a good fit for your finances.
Debt Avalanche in Practice
Get a better idea of how the debt avalanche may work in this real-life scenario below. The figures in the table provide sample monthly debt expenses and allow you to follow the process as we go through the various steps.
Real-Life Example: 26-Year-Old Ivan
To illustrate the debt avalanche method, Ivan has a goal to be debt-free by the time he turns 30. He is a 26-year-old with a steady job and is currently focusing on paying off his debts — several personal loans, a car loan and his credit card. Here are the steps he took to accomplish his goal.
Benefits and Drawbacks of the Debt Avalanche Strategy
While there are multiple debt management strategies available, the debt avalanche method has become popular because it's one of the most efficient approaches. However, there is no such thing as a perfect debt reduction method. Although the debt avalanche method offers many benefits, it also has drawbacks. Before you determine if this strategy is right for you, take a moment to understand the benefits and drawbacks of the debt avalanche method.
Is Debt Avalanche Right for You?
It’s up to you to determine if the debt avalanche method is the best debt management strategy for you. There are some essential questions to consider before deciding if this method is worth pursuing or not.
Alternatives to Debt Avalanche
Since every financial situation is unique, there isn’t always a clear path to resolving debts. While debt avalanche offers an accelerated path, it may not be within your means to attempt this strategy. There are several other options you may find work best for your situation detailed below. Remember, the best debt management strategy is something that you can stick with until you can pay your debts in full.
1. Debt snowball: The snowball strategy is probably the most popular alternative to debt avalanche. It operates in a similar process, by determining disposable income and listing your expenses. However, debt snowball involves paying off the debt with the smallest balance. It often brings immediate results, resulting in higher levels of motivation.
2. Debt consolidation loan: Another way to handle multiple debts is by combining them in a single, larger loan. Debt consolidation offers unique benefits, such as lower interest rates and an accelerated debt repayment timeline. It’s also easier to manage since you’ll only have to deal with one due date and monthly payment per month.
3. Debt management (with a counselor): Although some people prefer DIY debt management strategies, others may need external help. You don’t have to do it on your own — you can procure the services of a credit counselor who will help you create a debt management plan. All you need to do is execute it and continue to work at achieving your milestones and goals.
4. Balance transfer credit cards: This alternative works best if most of your debt comes from using multiple credit cards and you can transfer your existing balances into one. If you can find balance transfer cards with 0% APR offers, you can avoid paying for interest for a limited time. Since it consolidates all your credit cards, you’ll only have to pay one monthly statement.
Debt Avalanche FAQs
You may have several questions regarding the debt avalanche method. Here are the most commonly asked ones to provide you with more information.
Debt management is a plan or strategy put in place to ensure your financial obligations are paid on time. There are several strategies you can employ to keep your debts on track for full repayment. The debt avalanche method is one of the most popular approaches to debt management; however, you will have to determine whether it’s the best strategy for your finances.
Accelerated debt repayment allows you to pay off your debt in a shorter time period by making voluntary payments on top of the minimum amount. Note that some lenders don’t permit it and may penalize you if you choose to pay off your loan early.
Create a comprehensive list of your essential expenses, such as food, rent and utilities and find the total amount you spend on these. You will then subtract the total amount from your monthly income. What’s left is your disposable income. You can use it to pay your debts’ monthly minimums and apply the debt avalanche method.
The debt avalanche method is a debt management strategy that involves five steps:
- Determine your disposable income.
- Arrange your debt from the highest interest rate to the lowest.
- Use your disposable income to pay your required monthly minimums. Then, add whatever’s left to the debt with the highest interest. Continue doing this until you've paid the debt in full.
- Add your excess funds (which you previously used to pay your first debt) to the monthly minimum of the debt with the second-highest interest rate.
- Repeat the process until you’ve finished paying for all your existing debts.
Debt avalanche is only one of several strategies to help you manage your financial obligations better. If it doesn’t work for you, you can explore the debt snowball method, another DIY debt management approach. You can also try debt consolidation or using balance transfer cards. You can work with a credit counselor if you need external support.
Related Content
There are several concepts related to debt management and the debt avalanche method. The following resources can help you learn more about managing debt, your emotions and how to continue to pay off your balances.
- 10 Mistakes You Should Avoid When Managing Your Credit: Being in debt isn’t the end of the world, but there are certain things you should avoid to prevent your situation from worsening.
- Managing Your Money: Strategies to Consolidate Multiple Debts: Debt consolidation is another method you can use to manage your outstanding financial obligations. MoneyGeek’s guide explores this alternative in detail and shares the advantages and disadvantages it brings.
- The Biggest Financial Stressors for Americans with Debt During COVID-19: We have multiple stressors on a daily basis. MoneyGeek’s survey shows that most people considered their finances a significant source of stress during the pandemic.
- The Guide to Budgeting: Determining your disposable income is one of the first steps to managing your debt. If you find yours isn’t enough to begin debt repayment methods, budgeting can help you increase it. It also allows you to determine if you need to earn additional income.
- Understanding Credit Card Debt and How to Pay for It: Having a credit card can be an advantage, but if you’re not careful, your debt may grow exponentially without you noticing. It’s best to understand common pitfalls when using credit cards and learn some pay-down strategies.
About Nathan Paulus
