This is a step-by-step guide on how to pay off debt with the debt avalanche method. Use these free debt avalanche printables to pay off debt and live the debt-free life.
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Debt sucks. It’s a time-suck, stress-suck, money-suck, and …..well…you get the point.
But let me tell you from experience, getting out of debt is one of the best feelings in the world. You feel accomplished. You feel confident (hey, it took a lot of discipline and hard work to become debt-free). You feel in control of your financial future. Oh, and your money is finally yours again.
Getting out of debt sounds awesome, right? But how do you actually pay off your debt and become debt-free? There are two main ways: The Debt Snowball Method and the Debt Avalanche Method.
Today, I’m going to share with you everything you need to know about Debt Avalanche Method. You’ll learn what it is, how to implement it, and the pros/cons of using this method.
But full disclosure? (<– you always get the truth on this blog!) I didn’t use the Debt Avalanche Method when paying off my debt. I used the Debt Snowball Method and I personally think it’s the better way to pay off debt. Don’t worry, I share why at the end of the post.
Okay, let’s get started with everything you need to know about paying off debt with the Debt Avalanche Method!
Quick Summary of the Debt Avalanche Method
The Debt Avalanche Method is a strategy to help you prioritize and pay off your debt quickly. Using this method, you pay minimum payments on all your debts except for the one with the highest interest rate. All of your extra money goes towards paying off the debt with the highest interest rate. Then you move onto your debt with the next highest interest rate. And so on until all your debt is paid off.
Using the Debt Avalanche Method, you prioritize your debt by highest interest rate. This is different from the Debt Snowball Method where you prioritize your debt by the lowest balance.
Step 1: List all your debts and prioritize them from highest interest rate to lowest interest rate
Before you get knee-deep in debt payments, debt payoff strategies, or penny pinching, you need to know exactly what debts you have. List every single debt that under your name (it doesn’t matter how small the debt it – yes, include the $5 you owe your friend for lunch).
Get a copy of your credit report to make sure that you aren’t accidentally forgetting any debts in your list. When listing all your debts, don’t forget to record the interest rate, balance, and minimum payment.
When you have your list of debts, arrangethem from highest interest rate to lowest interest rate.
Ignore the balance of each debt because they don’t play a role in how you decide which debt to pay off first.
Here is an example of Step 1:
- Debt Priority 1: Credit carddebt (interest rate: 29%, balance: $13,537)
- Debt Priority 2: Car loan (interest rate: 12%, balance: $19,102)
- Debt Priority 3: Student loan #2 (interest rate: 8.9%, balance: $23,433)
- Debt Priority 4: Student loan #1 (interest rate: 3.6%, balance: $2,058)
Side note: I have the perfect worksheet to help you with this step. Keep reading and at the end of the post you’ll find out how to get it for free!
Step 2: Minimum payments + extra on your debt with the lowest interest rate
During Step 2, you start paying off your debts. You need to pay the minimum payments on all your debts. However, for the debt with the highest interest rate, put all your extra money towards paying down the principal balance.
Did you laugh when I said extra money? I don’t blame you. Who has extra money? Nobody (well, nobody I know). But let’s get real. You need to “find” as much money as you can to pay off your debts. Your debt isn’t going to magically disappear.
So how do you “find” money? Go through your budget and slash all non-essential spending (it’s tough, but it needs to be done). For your regular bills, find ways to reduce them (call your insurance company to see if they can lower the bill, start saving money on groceries, consider moving to cheaper housing, etc.). Make your way to a bare-bones budget.
Before you know it, your first debt (which is your debt with the highest interest rate) will be paid off!
During Step 2, this is what the example looks like:
- Debt Priority 1: Credit carddebt (interest rate: 29%, balance: $13,537, minimum payment $45/month) – pay minimum payment + any extra money you have
- Debt Priority 2: Car loan (interest rate: 12%, balance: $19,102, minimum payment $350/month) – pay minimum payment
- Debt Priority 3: Student loan #2 (interest rate: 8.9%, balance: $23,433, minimum payment 246/month) – pay minimum payment
- Debt Priority 4: Student loan #1 (interest rate: 3.6%, balance: $2,058, minimum payment $106/month) – pay minimum payment
Step 3: Start paying off your debt with the second largest interest rate
Once your debt with the highest interest rate is paid off, start paying off your debt with the second highest interest rate.
Since you no longer have to pay anything towards your highest interest rate debt (it’s gone!), you can add its minimum payment to the debt with the second highest interest rate. You’ll also want to putany extra money towards the second highest interest rate debt.
During Step 3, this is what the example looks like:
- Debt Priority 1: Credit carddebt (interest rate: 29%, balance: $13,537, minimum payment $45/month) – pay nothing…this debt is gone!!
- Debt Priority 2: Car loan (interest rate: 12%, balance: $19,102, minimum payment $350/month) – pay minimum payment + minimum payment from Debt 1 ($45/month) + any extra money you have
- Debt Priority 3: Student loan #2 (interest rate: 8.9%, balance: $23,433, minimum payment 246/month) – pay minimum payment
- Debt Priority 4: Student loan #1 (interest rate: 3.6%, balance: $2,058, minimum payment $106/month) – pay minimum payment
Step 4: Continue the Debt Avalanche until you are debt free!
Once your first two debts are gone, start attacking your debt with the third largest interest rate.
Each time you pay off a debt, you add its minimum payment to the next debt. This is very similar to the Debt Snowball Method. However, with the Debt Avalanche, the order in which you pay your debt is different. You always pay the debts with the highest interest rate first.
During Step 4, this is what the example looks like:
- Debt Priority 1: Credit carddebt (interest rate: 29%, balance: $13,537, minimum payment $45/month) – pay nothing…this debt is gone!!
- Debt Priority 2: Car loan (interest rate: 12%, balance: $19,102, minimum payment $350/month) – pay nothing…this debt is gone!!
- Debt Priority 3: Student loan #2 (interest rate: 8.9%, balance: $23,433, minimum payment 246/month) – pay minimum payment + minimum payment from Debt 1 ($45/month) + minimum payment from Debt #2 ($350/month) + any extra money you have
- Debt Priority 4: Student loan #1 (interest rate: 3.6%, balance: $2,058, minimum payment $106/month) – pay minimum payment
Continue rolling over the minimum payments until all your debts are paid off!
The benefits of the Debt Avalanche Method
One of the reasons debt is so bad is because you have to pay interest on the money you borrow. Interest is money that goes directly to the loan company and does not lower your principal balance.
When I first started paying off my student loans, I was paying $800 – $900 EACH MONTH towards interest. My student loan balance was barely going down (read more about how student loan interest is calculated).
Using the Debt Avalanche Method, you pay off your highest interest rate debts first so you can pay as little interest as possible. The less interest you pay, the better – that means that less money is being “thrown away” to the loan company and more money can go towards paying down the principal on your debts.
From a purely mathematical perspective, prioritizing paying off debts with high interest rates will get you out of debt faster because you are paying less towards interest and more towards the principal balance on your debts.
High interest rate debt is bad, so paying it off before lower interest rate debt will save you money in interest. <– Now this statement is true. Very true. BUT (big BUT here), that assumes that all other things are equal. And I personally don’t think that all other things are equal – read below to find out why I prefer the Debt Snowball Method.
Why I used and prefer the Debt Snowball Method (vs the Debt Avalanche Method)
I’m a math person. I’ve always loved it and I’m good at it. That’s why I became an engineer. It’s also why I was so head-strong about using the Debt Avalanche Method to pay off my student loans. The Debt Avalanche Method makes the most sense mathematically – with all other things equal, you save more money by paying off your highest interest rate debts first.
Fast forward a few years (I think 3, maybe 4 years) after graduating, and I still hadn’t made a dent into my student loan debt. I still had six figures of debt despite paying over $1,200 each month to the loan companies. It was demoralizing. I didn’t understand why my debt was still lingering around. I felt hopeless and overwhelmed…and honestly sad because I thought I’d have this debt forever.
I decided I need to try other debt repayment methods because the “obvious answer” (<– which as a math person I thought was the Debt Avalanche Method) wasn’t working. That’s when I started using the Debt Snowball Method.
With the Debt Snowball Method, you prioritize your debt from smallest balance to largest balance. You pay the minimum payments on all debts and throw all your extra money at your smallest (lowest balance) debt. Once that is paid off, you move onto your next smallest debt (and you apply the minimum payment from your first debt towards paying off your second debt).
You should pretty quickly pay off your first debt. Heck, it’s your smallest (hence easiest) debt! That feeling of accomplishment is what makes the Debt Snowball Method work.
You know that magic feeling you get when you cross something off your to-do list? Multiply that feeling by 34234234 and you get the feeling of paying off your first debt. But the best part is that the feeling gives your motivation, momentum, and excitement to continue paying off debt and continue your Debt Snowball.
Since you no longer have your first debt, you can apply that minimum payment to your second debt. It really gets you moving. You feel like you CAN get out of debt. You actually feel one step closer. And trust me, that feeling is worth it. You’ll find yourself trying to save money everywhere, cutting things from your budget, selling everything. You won’t care about interest rates anymore. You are on a roll – rolling your debt snowball towards debt freedom.
That feeling, that sense of accomplishment, that momentum that you get from the Debt Snowball Method is why I prefer it over the Debt Avalanche Method. It’s the method that worked for me.
Should I use the Debt Avalanche Method?
Just because the Debt Avalanche Method didn’t work for me, doesn’t mean that it won’t work for you. I think if you have the following characteristics, then it’s worth giving the Debt Avalanche Method a shot.
- You are a determined person. Nothing gets in your way. You are never distracted by shiny new objects. (<– oh how I wish this was me. While I am super determined, I’m also all over the place and an object doesn’t even have to be shiny to distract me)
- You are competitive…with yourself. You are always trying to outdo yourself. You saved $10 at the grocery store last week…that means you’re going to try to save $15 at the grocery store this week.
- You are a hustler. You are always looking for ways to make or save more money.
- You always stick to your plan. If you have a plan, you won’t deviate from it. Your New Year’s resolutions are kept and your to-do lists are always completed.
Free Debt Avalanche Printables!
So do you want to give the Debt Avalanche Method a shot? If so, I’ve created three Debt Avalanche printables to help you get there faster. If you sign up below, you’ll receive three printables over the course of three days. Here’s a look at what you’ll get.
- Debt Priority printable – this helps you organize ALL your debts and prioritize them from highest to lowest interest rate (making step 1 easy peasy)
- Debt Avalanche Tracker printable – this debt thermometer is the perfect way to visualize your debt payoff progress! (<– And you can print as many as you want. Only 2 debts? – print 2. 16 debts? – print 16!)
- Debt Avalanche Payments printable – never miss a payment…and marvel at all the payments you’ve made with this printable
Being debt free changed my life. The sacrifice now is worth the debt-freedom later. But you are never going to get out of a debt without a plan and method. It doesn’t matter if you choose the Debt Avalanche Method or the Debt Snowball Method – as long as you stick to the plan, you’ll become debt free and live the dream life!
Are you just starting out with your Debt Avalanche or have you already made some progress? Why did you choose this method versus the Debt Snowball? I’d love to hear from you!
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