Debt is a slippery slope. You can be doing just fine when an unexpected bill starts a slide. Maybe you use a credit card or three to keep up for a while. But one setback — like major car repairs — throws you off balance again, and eventually debt begins to swallow you up.
But there’s good news. First, you’re not alone. Second, millions of people like you have dug themselves out of debt using the Debt Avalanche Method. This debt reduction strategy focuses your efforts on the debts with the highest interest rates. Keep reading to learn the advantages and disadvantages of this strategy, as well as some proven alternatives for paying off debt.
Key Points
• The Debt Avalanche Method focuses on paying off high-interest debts first, and making minimum payments on others, to save on interest and reduce overall debt faster.
• Ideal for disciplined, logical individuals who prioritize long-term savings over quick wins, the method isn’t suitable for all debts; mortgages are considered “good” debt and should be excluded.
• Alternatives like the Snowball Method or debt consolidation loans may be better for those needing quick motivation or dealing with multiple high-interest debts.
• Psychological factors such as discipline, motivation by long-term goals, and the ability to celebrate self-made milestones influence the method’s success.
• Consider interest rates on your debt, your financial goals, and personal preferences when weighing your options.
Understanding the Debt Avalanche Method
The Avalanche Method is all about the interest rate. Essentially, you’ll make the minimum payments toward all of your debts but put anything extra you can (bonuses, tax refunds, that $20 your grandma stuck in your pocket) toward paying off the high-interest debt at the top of the list. When it’s paid off, move on to the debt with the second-highest interest rate and so on.
Fans of the Debt Avalanche Method laud its efficiency. The most expensive debt is ditched first, which can be a big money saver. And the amount of time it takes to get out of debt overall is cut too, because less interest accumulates every month.
Debt Avalanche Method vs. Other Payoff Strategies
The Avalanche is for rational thinkers. But when it comes to money — and life in general — humans tend to follow their gut. That’s why some people prefer the Avalanche’s more emotionally available cousin, the Snowball Method.
With the Snowball Method, the steps are much the same, but you start your list with the smallest balance and work your way toward the largest, disregarding the interest rate. The idea is that those first targets can be knocked down quickly, creating a sense of accomplishment that helps keep you on task until it becomes a habit.
There are pros and cons to each method. If you use the Avalanche, it may take longer to move from one debt to the next. Also, this method assumes paying off debt as quickly as possible is always the right thing to do. But there are other factors to consider, like your credit score. That said, if you have a larger balance with higher interest rates, you could save money over time.
If you plan to pay off debt with the Snowball Method, you’re more likely to experience quick wins, which could help you stay motivated. But you probably won’t save as much on overall interest as you would with the Avalanche.
If you have multiple high-interest balances, you may want to consider a debt consolidation loan. These personal loans roll several debts into a single loan, which ideally has a lower interest rate. This approach can be a smart move if you’re able to stay on top of monthly payments and have a strong credit score.
Implementing the Debt Avalanche Method
Interested in trying the Debt Avalanche Method? It helps to get your finances organized first.
First, make a budget. Find ways to trim the fat from anything you can — dinners out, streaming services — so you’ll have more cash to pay toward that smothering debt. If you need help, here’s a guide to the 70-20-10 rule of budgeting.
Then make a list of all your debts. Start with the loan or credit card that has the highest interest rate, and work your way down to the one with the lowest interest rate. Continue to make the minimum payments on all your debts, but put anything you can (bonuses, tax refunds, that $20 your grandma stuck in your pocket) toward paying off the high-interest debt at the top of the list.
When the first debt on your list is paid off, cross it off and move to the next debt on your list. Roll whatever payment you were making on the first debt into the second debt, adding it on to the minimum payment. When that debt is paid off, do the same with the third on the list. As you continue paying off outstanding debt, you should have more and more money to put toward the next target balance. Keep going until you’ve plowed through each debt on your list and can declare yourself debt-free.
Depending on how much you owe, it could take some time before you’re able to move from one debt to another. Adopting sound financial habits, like tracking spending and using a budget app, can help you stick to your payoff plan.
Is the Debt Avalanche Method Right for You?
Using the Avalanche Method to pay off debt isn’t necessarily a good fit for everyone. The method is great for disciplined, analytical thinkers who get excited by the knowledge that they’re playing the long game. To make this approach a success, it helps to be the type of person who is self-disciplined, self-motivated, self-aware, and capable of celebrating self-made milestones.
Alternative debt payoff strategies, like the Snowball Method or a personal loan, may make more sense for your lifestyle, financial situation, and personal preferences.
Here are some questions to ask yourself as you weigh your options:
• What are my short- and long-term financial goals?
• Do I have high-interest debt?
• Do I need a series of quick wins to stay motivated?
Maximize the Benefits of the Debt Avalanche Method
Before you begin tackling debt with the Avalanche Method, consider some strategies to get the maximum benefits:
• Accelerate debt repayment. Paying off your balance doesn’t just relieve stress — it can also save on interest. Kick in more than the minimum payment each month. And if your lender and budget allow, make extra payments.
• Build an emergency fund. While whittling down debt is the priority, it’s also a good idea to sock away money into an emergency fund. Determine a target amount — a good rule of thumb is to have enough to cover three to six months of expenses. Then open a high-yield savings account and add to it regularly.
• Seek the help of a professional. Looking for personalized guidance? Consider meeting with a financial advisor, who can examine your current finances, discuss your financial goals, and help you create a plan to achieve them.
The Takeaway
Using the Debt Avalanche Method is a great way to pay off debt for disciplined, logical personalities who want to maximize their savings on interest. The Avalanche works by paying down the highest-interest debt first, regardless of balance, while making minimum payments only on other debts. It’s not for everyone, though, especially if your highest-interest debt is also your biggest balance.
If quick wins help you stay motivated, consider paying off debt with the Snowball Method. Instead of focusing on interest rate, borrowers prioritize the lowest balance first. A debt consolidation loan is another potential avenue to explore, as you can roll multiple high-interest debts into a single loan with (hopefully) a better interest rate.
The key to any debt payoff strategy is to know yourself and choose the method that best fits your preferences and financial goals.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
How long does it take to pay off debt using the Avalanche Method?
While the Avalanche Method tends to whittle down debt faster than making minimum payments each month, the time it takes for you to pay off your balance will depend on the amount you owe, your interest rate, and how much extra you’re able to pay each month.
Can the Debt Avalanche Method be used for all types of debt?
The Avalanche isn’t suited for every type of debt. Consider using it to pay off credit cards, personal loans, student loans, and car loans. Don’t include your mortgage, as financial experts consider this “good” debt. One day, you may decide to put extra money toward paying down your mortgage principal, but for now, focus on your other debts.
What should I do if I have multiple debts with
similar interest rates?
When faced with paying down multiple debts with similar interest rates, the Snowball Method may be your best approach. It involves paying off your lowest balance first, while making minimum payments on your other debts. If the interest rates are high, you may want to explore a debt consolidation loan. That’s where you take out one loan or line of credit (ideally with a lower interest rate) and use it to pay off other debts.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOPL-Q424-059