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To avalanche or not, that is the question. Pay down your debts using the Avalanche debt reduction method to eliminate them and to save money.
Financial freedom starts by eliminating debt to a manageable level and hopefully living debt-free. Many people are learning about how to get rid of their accumulated debts to achieve the financial freedom dream.
There are different ways to tackle your debts. But, no debt reduction method is going to work, unless you become very serious about your goal.
That is the first thing you must tackle, becoming intentional about paying your debts.
Feeling anxious and overwhelmed about debt burden is normal. This is why sticking to a road map may help ease your anxiety.
Once you are ready to live debt-free, finding a strategy that works for you becomes easier.
You probably heard of the Avalanche method. It was created by Personal Finance guru, Dave Ramsey. He is well known for helping people with their debt problems and their finances.
Find out all your debts before starting a plan. If you don’t know what’s on your credit report and your score, you can order one.
What is the Avalanche Debt Reduction Method?
Every debt reduction program is a system to help you navigate thru and automate your tasks.
Dave Ramsey developed the Avalanche strategy to help people get out of debt faster. The Avalanche prioritizes debt with the highest interest rate, followed by the second highest interest rate and so on.
The Avalanche forces you to eliminate your most troublesome debts first. You need to make the minimum payments on all other debts, until you get rid of the highest interest ones.
This method makes very good sense. However, not everyone is able to stick with it. Some people prefer to pay down the smaller debts first and feel a sense of accomplishment. You should use a strategy that works for you.
Remember that interest payment is money you pay the credit company in exchange for the money borrowed. Interest payment does not reduce your principal.
So, here it is if you want to try the strategies used in the debt Avalanche.
Things you need in order to use the Avalanche method
Your priority is probably, how to get rid of debt fast? or How to get rid of debt without money?
However, paying high amounts of debts is not easy. You need to be patient with yourself and trust your progress. To use these debts payment strategies and be successful to the point of paying down your debts, you need all of these things.
- Be able to stick to a plan – commitment
- Get organized – write down your debt by type, minimum payment, interest rate.
- Keep track of your debts and payments
- Be patient
- Get a side hustle. Although not required, extra income can speed up the process of getting rid of debts.
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- Passive income you can build with your talents
- Participate in focus group to earn $75 – $200 per session
Are you a good fit for the Avalanche method?
The Avalanche debt payment plan’s main goal is to get rid of the debt with the HIGHEST interest rate first. The idea is that you’re “wasting” money on interest by keeping high interest rate debt.
This money can be better used to pay down a different debt. And, this makes sense.
The problem some people using the Avalanche encounter is that while you’re paying your highest interest debt first, this may take a while. So, some people lose patient and go off track.
This is why if you decide to use the Avalanche plan, you need to focus and be patient. At the end you’re going to payoff your debts and save money on interest too.
To Avalanche or not – this method advantages and shortcomings
The Avalanche forces you to organize your debts and prioritize them. It also makes you pay the highest interest rate debt first, therefore saving you money in the long run.
This is also the most troublesome debt because of the high rate.
For some people the Avalanche debt reduction method has shortcomings. By focusing first on the highest interest rate debt, it may take a long time before you get rid of the first debt.
This for some is not very motivating, even though the math is on their side.
If you can stick to it, the Avalanche makes sense by getting rid of your highest interest debt first. However, if you need to see faster results, paying the smallest debts first makes more sense for you.
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How to use the Avalanche for debt reduction
General – Organize your financials – these are the recommendations and the requirements by the Avalanche method. At a minimum, you should fulfill the requirements of the Avalanche.
- Make a budget – list out your income and expenses, including debt payments. This is a recommendation.
- Understand where all your money is going. This is a recommendation
- List your debts by type with amount outstanding, interest rate, minimum payment and due date. This is required by the Avalanche method.
- Get your credit report
- Get a side hustle or more – recommendation.
Step 1. Understand how to use the Avalanche method – This method places the highest interest rate first, a priority.
This is followed by the second highest rate and so on. For example, as illustration these numbers aren’t real. Look at the following debts.
This is how they should be listed, from highest rate to lowest.
1. Credit card debt: 20% interest rate, $10,000 balance, $200 minimum
2. Car loan debt: 15% interest rate, $20,000 balance, $400 minimum
3. Student loans: 8% interest rate, $30,000 balance, $500 minimum
Step 2. Start paying the debt with the highest interest rate, use any extra money
You need to make minimum payments on all your debts, except the one with the highest interest rate – Avalanche this one.
Remember that this debt is priority. Any extra money from savings and working a side hustle will go towards paying this debt first. This money will go towards paying down the principal of your debt.
1. Credit card debt: 20% interest rate, $10,000 balance, $200 minimum
Make the minimum payment of $200, PLUS any extra money you have. So, if you did some side hustling this month, put it all towards this highest rate debt.
2. Car loan debt: 15% interest rate, $20,000 balance, $400 minimum
Make the minimum payment.
3. Student loans: 8% interest rate, $30,000 balance, $500 minimum
Make the minimum payment.
Step 3. Start paying off your debt with the second highest interest rate
1. Credit card debt: 20% interest rate, $10,000 balance, $200 minimum
This debt is done, after a while.
2. Car loan debt: 15% interest rate, $20,000 balance, $400 minimum
Make the minimum payment, plus the extra money from the first debt, plus any extra money from side hustling.
3. Student loans: 8% interest rate, $30,000 balance, $500 minimum
Once your first debt is paid off, you start with the second priority debt. This won’t happen over night. Paying off debt takes time, specially the large amount ones.
In this step you’ll make the minimum payment, plus the payment money from the first debt (this one is paid off), plus any extra income from side hustling.
Here, your debt reduction starts to accelerate because you’re using more sources of cash to pay the rest of your debts.
Step 4. Continue to Avalanche your debts until all of them are paid off
1. Credit card debt: 20% interest rate, $10,000 balance, $200 minimum
This debt is done.
2. Car loan debt: 15% interest rate, $20,000 balance, $400 minimum
This debt is done.
3. Student loans: 8% interest rate, $30,000 balance, $500 minimum
Make the minimum payment, plus the payments from debt 1 and 2, plus extra money.
Once you’re finished with the last debt, you are debt free.
Summing it up. The Avalanche debt reduction method’s main goal is to save you money on interests and getting out of debt. You start paying off the debt with the highest rate, then the second highest and so on. The money that is freed up goes toward paying down your principals.
Not all debt is bad, however high interest debt is very bad. Paying high interest on your debt means your principal balance barely goes down with each payment.
Getting rid of the highest interest rate credit card or loan can save you a lot of money. That’s the core of the Avalanche’s strategies.
Have you tried this or any other debt reduction strategies?
