Demystifying Financial Jargon: The Avalanche Approach

The debt avalanche method is the “mathematically correct” way to repay your debt. Its focus is to reduce how much interest you’ll pay over the life of your debts by chipping away at the largest interest rate first. The downside is that it takes much longer to see your initial efforts pay off and therefore, is less likely to keep you motivated to stay trucking towards your debt free goals.

To start, you write all your debts from largest interest rate to smallest interest rate. You continue to pay the minimums due on all debts, but any extra money you can spare goes towards the debt with the largest interest rate. Once that’s paid off, you take the newly freed up payment and apply it to your debt with the second highest interest rate, and so on.

Let’s use the example from debt snowball to see avalanche in action:

  • Credit Card 2: $4,300, 22% APR, minimum due: $185
  • Credit Card 1: $500, 19% APR, minimum due $30
  • Auto loan: $4,000, 5% APR, minimum due: $200

 

Total due each month: $415, but you can afford to pay $500.

You apply the extra $85 each month toward Credit Card 2 for a total of $270 a month.

  • Credit Card 2: $4,300, 22% APR, minimum due: $270
  • Credit Card 1: $500, 19% APR, minimum due $30
  • Auto loan: $4,000, 5% APR, minimum due: $200

 

Once that debt is paid off, you add the $270 to $30 for $300 going toward Credit Card 1 each month. Ultimately, the full $500 will be going towards the auto loan and you will have also paid less in interest overall than doing debt snowball.

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