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.
Download a Debt Avalanche Handbook to Help You Pay Off Debts
You can start using the debt avalanche method with MoneyGeek's printable handbook. This handbook will help you list your current debts, organize them by the highest to lowest interest rates and walk you through a step-by-step guide on how to pay off each of your debts.
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.
- Debt typeBalanceAnnual Percentage Rate (APR)Monthly Minimum
Personal Loan I
Personal Loan II
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.
Step 1: Recognize the amount of debt & strategize how to pay it off
Ivan noticed that he’d left his previously miniscule debt unattended and has now ballooned to thousands of dollars. He decided to use debt avalanche to accelerate his repayment since it results in less interest paid in the long run.
Step 2: Examine ways to make lifestyle changes
After examining his current lifestyle, he discovered he could have as much as $1,200 in disposable income each month. All he needed to do was change his activities and be more mindful of his spending habits.
Step 3: Arrange debts by their interest rate
Ivan made a list of his existing debts and arranged them by their interest rate — from highest to lowest. He determined his priority should be his credit card.
Step 4: Understand how much is needed to pay each debt
He noted how much he needed to pay each debt per month. With his newfound disposable income of $1,200, he decided to use it for the monthly minimums.
Step 5: Set aside monthly payments
After setting aside the monthly minimums of each debt, Ivan revisited his disposable income. He found that he still had $200 left.
Step 6: Consider putting extra money toward paying off the debt rather than spending it
Ivan decided he would use the $200 to manage his debt instead of spending it. He added it to his credit card payment.
Step 7: Review monthly payments
After allocating his disposable income to his existing debts and adding the remainder of it to the debt with the highest interest, his monthly payments were now:
- Credit Card: $350 ($150 + $200 from disposable income)
- Personal Loan I: $200
- Personal Loan II: $300
- Auto Loan: $350
Step 8: Keep regularly payments
Ivan continued this same process each month until he paid his credit card debt completely.
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.
Benefits and Drawbacks of Debt Avalanche
- Since you focus on the highest interest rate debt first, you eliminate quickly accruing interest. As a result, you pay less in interest in the long run.
- This process clears your debts quickly. Although you may feel as if there is little movement in the beginning, it’ll speed up after you've paid your first debt in full. You’ll go through the debts with lower interests faster since these don’t accrue as quickly.
- Debt avalanche offers a logical approach to debt repayment. Dealing with the debt with the highest interest rate eliminates the most sizable obstacle first. This makes it easier for you to manage the rest.
- Debt avalanche pushes you to look at various factors affecting debt, such as minimum payments and interest rates. Understanding your debt is as important as having a plan to pay it off.
- Debt avalanche requires you to demonstrate a high level of discipline. If you fail to follow the process continuously, you won’t see a large reduction in your debts.
- It may take longer to see immediate results. The first debt you start with accrues the most interest, which could make it more challenging to stay motivated.
- Debt avalanche assumes you have enough income to pay for essential expenses and your debts' minimum monthly dues. On top of that, you must have enough disposable income remaining for your increased monthly payment. If you don’t, you may need to earn extra income before using this 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.
How much of my disposable income can I commit?
The more disposable income you have, the sooner you’ll be able to pay off your debts. You can determine your disposable income by listing your expenses — prioritizing fixed costs such as groceries, rent and utilities — and deducting the total from your monthly income.
If you want to use debt avalanche, your income must cover several things. These include your essential living expenses, paying for the minimum amount of each existing debt and having money left for the repayment process. If you don’t, it’s a good idea to reassess your income and think about ways to earn extra income.
Am I disciplined enough to follow a debt avalanche plan?
Being disciplined and committed are crucial to being successful with the debt avalanche method. Since this process requires you begin with the highest interest debt, you won’t see immediate results. This can be frustrating, disappointing and impact your motivation. Being committed allows you to continue with the process and being disciplined pushes you to complete your repayments regularly.
Do I have enough savings to cover emergency expenses?
It’s ideal to have at least six months of worth of income in your savings account before attempting to apply the debt avalanche method. You may also consider earning extra income to shorten your timeline. This way, you also prevent your existing debts from growing exponentially because of interest.
If you’re not certain the debt avalanche method is the right process for your finances, you can always consider other approaches to debt management. The following alternatives may present a better fit for your needs.
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.
MoneyGeek spoke with several experts about debt management and the debt avalanche method to provide you with their experience and expertise for additional insight.
- What causes people to have difficulties managing their debt?
- In what situations would you recommend someone to use the debt avalanche method?
- Are there scenarios wherein the debt avalanche method may not be the best approach? What alternative debt management strategies would work better in these cases?
CPA, Private Wealth Advisor at Munroe Morrow Wealth Management
SVP of HR, Brand & Culture at Ubiquity Retirement + Savings
Co-Founder & Technical Lead at Fig Loans
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.
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