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Paying down debt is a really important step in everyone’s finance journey and you may not know it, but Debt Avalanche is underrated for accelerating your debt payoff.
When it comes to well known debt repayment strategies, Debt Snowball gets the most press. But have you heard of the Debt Avalanche, Snowball’s less sexy cousin? He actually has a great personality and will help you pay less in interest over time. Isn’t that what we all want?
Let’s have a quick review of these two methods:
This method attacks debts based on the order of lowest to highest amount owing. Start by writing out and arranging your debts in columns (on paper or in excel) from lowest total amount owing on the left, to highest total amount owing on the right.
This payment strategy focuses on throwing every extra dollar we can at the smallest debt first to get it gone! While you always pay minimum amounts owing on every debt each month, we throw anything extra at the smallest one to pay it off quickly, then move to 2nd smallest, and so on.
This method helps you get the feeling of a quick win. It can help you keep motivated due to this quick success.
This method attacks debts based on the order of highest to lowest interest rate. Start by arranging your debts from highest interest rate to lowest. You are ignoring the total amounts owing for now. While always paying minimums on each debt each month, we throw anything extra at the highest interest rate debt first, then move to 2nd highest, and so on.
People tend to love Debt Snowball because it is a more visually motivating process, and can help with sticking to your plan as you can see your progress quickly. Psychologically speaking, the quick wins it provides can help with motivation and keeping on track.
The not so great thing is it only prioritizes debts by their lowest amount first, and doesn’t take into consideration how much interest you are paying. Why should we pay off the small loan first with only 2% interest when you have a large loan with 29% interest accruing more and more daily!
As consumers and investors, we behave irrationally because our relationship with money is psychological and emotional. We do not always make the rational choice, and that’s ok.
Enter Debt Avalanche…
By listing your debts from highest interest rate to lowest, and attacking the highest interest rate first, you will actually end up saving yourself a lot more money in the long run on your interest payments. Owing less in overall debt.
Your debts may not always be paid off in the order we line them up in, depending on the amounts owing, but you know over time you are saving more interest by using this method. When you are trying to become debt free, this really counts for a lot.
Isn’t this what we all want?
Keeping more of your hard earned money in your pocket sooner is the ultimate goal! This is why I believe the Debt Avalanche is underrated, and you should consider giving it a try!
If you could use some help tracking your progress in using these two methods I have created a Google Sheets template that helps you follow Debt Snowball/Avalanche. Get the support you need to help you get started paying off debt in whatever way you prefer!
Attacking the highest interest rate debt first just makes more financial sense. Do you agree or disagree? What method have you used in the past for debt repayments? What worked for you? As always there is no right or wrong, only right for you – and right for you is whichever way you will consistently follow to reach your debt free goal!
Find more content like this in the Savings & Debt Section of the blog.