Benefits of the Debt Avalanche Strategy:
- It is the fastest possible way to get out of debt without using debt consolidation techniques.
- You pay less interest that you would using the Debt Snowball Strategy.
- It is a proven and structured technique that has helped many people get rid of their debt.
- It’s simple to do!
Cons of the Debt Avalanche Strategy:
If your high interest “focus account” is a large amount, it can take some time to see progress compared to the Debt Snowball Strategy, so you will need to be a bit more disciplined. But remember that even though progress may seem slow, in the long run, it is a much faster and cheaper technique.
Using this strategy, you start by focusing on the debt that has the highest interest rate.
The idea is to get rid of the higher interest debt which is going to help you in the long run.
The first step: Planning!
Build a spreadsheet of all your accounts and order them from the highest interest rates to the lowest.
You are going to start by paying only the minimum installments on all the accounts, then dumping all remaining cash into the “focus account” (The account with outstanding amounts that has the highest interest rate)
You will notice that credit cards, personal loans and clothing accounts will have much higher interest rates that vehicle finance for example.
This is because credit cards etc. is unsecured debt. Meaning that there is no asset attached to the debt that the banks can repossess in case of non payment, making it higher risk to the banks.
Remember, this technique requires that you ONLY make the minimum payment on all accounts, then dumping all money left over into the “focus account”.
Once the focus account is paid off, you have now free’d up the minimum payment you used to pay to that account, and you are now able to tackle the next high interest account with this additional money.
Keep doing this month after month, and every time you pay off an account, you add that accounts minimum payment to the funds available to pay off the next account.
As the name implies, the avalanche effect causes the volume of funds paid toward the debt increases exponentially.