This Repayment Method Crushes Your Debt One High-Interest Account at a Time
You’ve probably heard of Dave Ramsey’s debt snowball method of debt repayment. The debt avalanche is another wintry metaphor to help you figure out how to pay down debt.
What is the Debt Avalanche Method?
This method focuses on paying off your highest-interest debts first.
Also known as debt stacking, this method is great for people motivated by numbers — not so great for people motivated by feelings.
If your Myers-Briggs test always produces an “F,” the debt snowball method might be better for you. You can learn about that here.
If the debt snowball is like taking a couple of practice runs at the weakest links in Red Rover, the avalanche is like plotting the perfect strategy to poach the other team’s strongest players.
It’s hard work, and you won’t get instant gratification. But you’ll build strength, and the game will get easier as you go along.
All right, enough of the playground simile.
Why Use the Debt Avalanche
If you can’t tackle all your loans at once, paying off the highest-interest debts first is your smartest move. The longer they sit unpaid, the more debt you’ll accrue and the more this whole thing will cost you in the long run.
Let’s look at an example. (Warning: numbers ahead.)
Say you have:
- A $5,000 loan at 3% interest, and
- A $5,000 credit card balance at 15% interest, and
- A budget of $300 a month to pay toward debt.
According to this calculator, if you split it and pay $150 toward each debt:
- The loan will take 2.9 years to pay off and cost $227.23 in interest.
- The credit card will take 3.7 years to pay off and cost $1,508.52 in interest.
That’s not too bad. But, what if you put extra funds toward the high-interest credit card debt, instead?
If you pay $100 toward the loan and $200 toward the credit card balance:
- You’ll pay off the credit card in 2.6 years and pay $1,032.66 in interest.
- You can then add the $200 you were paying toward the credit card to your loan payment. In eight months, you’ll pay it off, and your total interest over 39 months would be $306.21.
Using the avalanche method to target your high-interest debt would help you be debt-free about five months earlier and save you $396.88 over paying toward each evenly.
Fun stuff, we know.
tl;dr: The debt avalanche method is usually the fastest and cheapest way to pay down your debt.
The debt snowball method, on the other hand, will cost you more in interest but could keep you motivated to stay on top of your finances.
As long as you’re paying off debt in the end, we support it.
Enough with the numbers. Who’s in the mood for a snowball fight?
Your Turn: Have you used the debt snowball or avalanche method?
Dana Sitar (@danasitar) is a senior writer at The Penny Hoarder. She’s written for Huffington Post, Entrepreneur.com, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).