What is the avalanche method and how does it work?

Feeling buried under a mountain of debt? It’s a common feeling, and frankly, a stressful one.

Debt can feel like a heavy weight, impacting your financial freedom and even your peace of mind.

But what if I told you there’s a powerful strategy that can help you chip away at that mountain, save you money in the long run, and get you to debt-free living faster?

That’s exactly what the debt avalanche method offers.

This guide will explain the debt avalanche method in detail, how it works, and why it can be such an effective tool for tackling debt.

By the end, you’ll understand if this strategy is the right fit for your financial situation and how to start implementing it today.

Let’s discover how to gain control of your finances and start your journey towards a debt-free future!

Understanding the debt avalanche method

So, what exactly is the debt avalanche method?

Imagine an avalanche. A small amount of snow dislodges, then picks up more snow as it tumbles down the mountain, growing larger and more powerful.

In the world of debt, the avalanche method uses a similar principle, but instead of snow, you’re “avalanching” your payments.

It’s the opposite of the snowball method and can work incredibly well.

At its core, the debt avalanche method is a debt repayment strategy where you focus on paying off your debts in order of their interest rates, from highest to lowest.

You make the minimum payment on all your debts, but any extra money you have goes directly towards the debt with the highest interest rate.

Once that high-interest debt is completely paid off, you take the money you were paying on it (both the minimum payment and the extra amount) and “roll” it into the next debt on your list with the highest interest rate.

You continue this process, moving down your list of debts, until every single one is paid off.

This method is incredibly appealing for those who are driven by numbers and want to save the most money on interest over the long haul.

Because you’re tackling the most expensive debts first, you reduce the total amount of interest you’ll pay throughout your debt repayment journey.

High interest rates mean your money is working harder against you.

By eliminating those first, you free up more of your payment to go towards the debt rather than just covering interest.

It’s a strategic and logical approach to becoming debt-free.

Prep steps for getting started

Before you can unleash your debt avalanche, you need to gather some important information.

This preparation will set you up for success.

1. List all your debts: Write down every single debt you have. This includes credit cards, personal loans, car loans, student loans, medical bills, and any other outstanding balances. Do not forget anything!
2. Gather key details for each debt: For each debt, you need to know:
   • The current balance owed.
   • The interest rate (Annual Percentage Rate or APR).
   • The minimum monthly payment.
   • The due date.
3. Organise your debts by interest rate: This is a crucial step for the avalanche method. Arrange your list of debts from the highest interest rate to the lowest interest rate.

The actual balance of the debt doesn’t matter for this initial sorting, only the interest rate.

4. Know your budget: Before you commit to any repayment strategy, you need a clear picture of your income and expenses. Understand how much extra money you can realistically afford to put towards your debt each month after covering all living costs and minimum debt payments.

This “extra” amount is your superpower in the avalanche method.

Best practices and helpful tips

• Automate minimum payments: Set up automatic minimum payments for all your debts. This ensures you never miss a payment, which can hurt your credit score and incur late fees.
• Be consistent with extra payments: The power of the avalanche method comes from consistently applying extra funds to your target debt. Make it a habit to put that extra money towards the highest-interest debt each month.
• Avoid taking on new debt: While you’re aggressively paying down existing debt, it’s vital to avoid accumulating new debt. Try to use cash or a debit card for everyday expenses to prevent your balances from creeping back up.

Tools and resources

• Spreadsheet: A simple spreadsheet (like Google Sheets or Microsoft Excel) is excellent for listing and tracking your debts, their interest rates, and your progress.
• Online debt payoff calculators: Many websites offer free debt avalanche calculators. These tools can help you visualise how quickly you’ll become debt-free and how much interest you’ll save using this method. Simply search for “debt avalanche calculator” online.
• Budgeting apps: Apps like YNAB (You Need A Budget) or Mint can help track your spending, identify areas where you can cut back, and find that extra money to fuel your debt payoff.

How the debt avalanche method works, step-by-step

Let’s walk through the mechanics of the debt avalanche method. It’s a straightforward process, but consistency is key.

Once you have your debts listed from highest to lowest interest rate and you know how much extra money you can put towards debt each month, you’re ready to begin.

1. Make minimum payments on all debts: This is your baseline.

Regardless of interest rate, you must make at least the minimum payment on every single one of your debts to avoid late fees and protect your credit score. This is non-negotiable.

2. Focus extra payments on the highest interest debt: This is where the “avalanche” truly begins.

Take any additional money you have available for debt repayment beyond your minimums and apply all of it to the debt at the very top of your list, the one with the highest interest rate.

For example, if you have £100 extra to pay towards debt, and your highest interest debt is a credit card, you’ll pay your minimum payment on that credit card plus that extra £100.

3. Continue until the highest interest debt is paid off: You’ll keep making minimum payments on all other debts but relentlessly attack that highest interest debt with every spare pound you have until its balance reaches zero.

This might take some time, especially if it’s a large balance, but remember you are saving the most money by doing this.

4. Roll the freed-up payment to the next highest interest debt: Once your first debt is completely paid off, congratulations!  You’ve reached a significant milestone.

Now, here’s the magic. Take the entire amount you were paying on that debt (its minimum payment plus any extra money you were adding) and apply it to the minimum payment of the debt with the next highest interest rate on your list.

This creates the “avalanche” effect. Your payment amount grows as you pay off each debt, accelerating the payoff of subsequent debts.

5. Repeat the process: You’ll continue this cycle until every single debt is gone.

Each time you eliminate a debt, the payment amount you “roll over” to the next debt grows larger, and you’ll see your remaining debts disappear faster and faster.

Let’s look at an example:

Imagine you have three debts:

• Credit card A: £5,000 balance, 25% APR, £100 minimum payment
• Personal loan B: £3,000 balance, 15% APR, £75 minimum payment
• Student loan C: £10,000 balance, 5% APR, £120 minimum payment

And let’s say you’ve found an extra £150 per month to put towards your debt.

Step 1: Order by interest rate (highest to lowest):

1. Credit card A (25% APR)
2. Personal loan B (15% APR)
3. Student loan C (5% APR)

Step 2: Start with Credit Card A:

• Pay the minimum on personal loan B (£75) and student loan C (£120).
• On credit card A, you pay its minimum (£100) + your extra £150 = £250 total payment.
• You continue paying £250 on credit card A until it’s paid off.

Step 3: Credit card A is paid off! Now focus on personal loan B:

• The £250 you were paying on credit card A is now freed up.
• Continue paying the minimum on student loan C (£120).
• On personal loan B, you pay its minimum (£75) + the £250 freed up from credit card A = £325 total payment.
• Continue paying £325 on personal loan B until it’s paid off.

Step 4: Personal loan B is paid off! Now focus on student loan C:

• The £325 you were paying on personal loan B is now freed up.
• On student loan C, pay its minimum (£120) + the £325 freed up from personal loan B = £445 total payment.
• You continue paying £445 on student loan C until it’s paid off.

You can see how the amount you’re applying to each subsequent debt “avalanches” and gets larger, speeding up the payoff time for each remaining debt.

This method ensures you pay the absolute least amount of interest over the life of your debts.

Troubleshooting common mistakes

Even with a solid plan, bumps in the road can happen.

Here are some common pitfalls when using the debt avalanche method and how to navigate them:

• Not having enough extra money: The debt avalanche method thrives on extra payments. If your budget is so tight you can only afford minimums, it will still work, but very slowly.
  • Fix: Revisit your budget with a fine-tooth comb. Can you cut back on discretionary spending (eating out, subscriptions, entertainment) even temporarily? Consider a temporary side hustle to boost your income.

Even an extra £20 or £50 can make a difference.

• Getting discouraged by slow progress on the first debt: Sometimes the highest interest debt is also the largest balance, meaning it takes a while to pay off. This can feel demotivating because you don’t see debts disappearing quickly.
  • Fix: Remember your ultimate goal is saving money. The longer it takes to pay off the first debt, the more interest you are likely avoiding.

Keep track of the interest saved rather than just the number of debts paid off. Use a debt payoff calculator to see the projected savings. Celebrate small victories, like hitting specific balance reduction targets.

• Missing minimum payments on other debts: Focusing intensely on one debt can sometimes lead to neglecting the minimum payments on others. This can lead to late fees and negative marks on your credit report.
  • Fix: Automate all minimum payments from your bank account. This takes the human error out of the equation. Double-check your bank statements regularly to ensure payments are going through as planned.
• Accumulating new debt: This is perhaps the biggest saboteur. If you’re paying down debt but also racking up new charges, you’re essentially running on a financial treadmill.
  • Fix: Commit to a “debt freeze” during your repayment journey. Put away credit cards if necessary. Create a strict budget and stick to it. If emergencies arise, try to cover them with an emergency fund rather than new debt.

Next steps

Once you’ve got the hang of the debt avalanche method and are seeing progress, you might be ready to explore some advanced strategies to supercharge your journey.

• Negotiate interest rates: Especially for credit card debt, contact your creditors and ask if they can lower your interest rate.

Explain your commitment to paying off the debt and how a lower rate would help you. It doesn’t always work, but it’s worth a try.

• Consider debt consolidation (with caution): If you have multiple high-interest debts, a debt consolidation loan or a balance transfer credit card might offer a lower overall interest rate and simplify your payments into one monthly bill.
  • Ensure the new interest rate is genuinely lower than your current average.
  • Beware of fees associated with consolidation (e.g., balance transfer fees, origination fees).¹⁷
  • Do not rack up new debt on the old accounts once they’re consolidated. This can leave you in a worse position.
• Increase your income: Beyond cutting expenses, look for ways to increase your income. This could be through a side hustle, overtime at work, selling unused items, or asking for a raise.

Every extra pound you earn can be poured directly into your debt avalanche, accelerating your payoff.

• Build an emergency fund: While aggressively paying down debt, it’s wise to have a small emergency fund (e.g., £1,000) in place. This prevents you from needing to use credit cards for unexpected expenses and derailing your progress.

Once your debts are gone, you can then focus on building a more substantial emergency fund (3-6 months of living expenses).

Conclusion

Taking control of your debt can feel daunting, but with a solid strategy like the debt avalanche method, you can transform that overwhelming feeling into empowering action.

By methodically tackling your highest-interest debts first, you not only pay off what you owe faster but also save a significant amount of money in interest.

This financially savvy approach can lead to true financial freedom.

Remember, consistency and discipline are your best friends on this journey.

It might not always be easy, especially when those first big debts take time to disappear, but the long-term benefits of reduced interest payments and a debt-free life are well worth the effort.

So, take that first step, list your debts, sort them by interest rate, and start your debt avalanche today!

Frequently Asked Questions

What is the difference between the debt avalanche and debt snowball methods?

The main difference lies in the order of repayment. The debt avalanche method prioritises debts by their interest rates, from highest to lowest. You pay off the debt with the highest interest first to save the most money on interest.

The debt snowball method prioritises debts by their balance, from smallest to largest.You pay off the smallest debt first to gain psychological momentum and motivation from quick wins, regardless of the interest rate.

Which method is better for me, the debt avalanche or debt snowball?

If your primary goal is to save the most money on interest and you are disciplined enough to stick with the plan even if the first debt takes a while to pay off, the debt avalanche method is generally considered more financially efficient.

If you need psychological wins and motivation to stay committed to your debt repayment journey, and seeing quick results on smaller debts will keep you going, the debt snowball method might be a better fit for you, even if it costs a bit more in interest over time.

Can I use the debt avalanche method for all types of debt?

Yes, the debt avalanche method can be applied to virtually any type of debt that accrues interest. This includes credit card debt, personal loans, car loans, student loans, and even some types of medical debt. The key is to know the interest rate for each of your debts.

How much extra money do I need to make the debt avalanche method effective?

Any extra money you can put towards your highest-interest debt will make the method more effective. Even a small extra payment can significantly reduce the amount of interest you pay and shorten your payoff time.

The more extra money you can consistently apply, the faster you will become debt-free and the more you will save.

What if I don’t have any extra money to put towards my debts?

Even if you can only afford the minimum payments right now, you can still apply the principle of the debt avalanche. Simply focus on making the minimum payments on all debts and pay the entire minimum payment of your highest interest debt first.

When that debt is paid off, the minimum payment amount you were making on it can then be rolled into the next highest interest debt. This will still save you money compared to simply making minimum payments on all debts indefinitely, though it will take longer without additional funds.