One of the most important financial habits you must learn to be financially stable is to avoid debts. But sometimes, your financial plans might not work as expected, and you borrow money to sort out your needs. If you're already in debt, you need to find effective strategies to clear your debts and enjoy a debt-free life.
Debts typically grow in amount by accumulating interests. So, if you can find a strategy that helps you minimize the interests as you pay up, you'll save some money. And one such method of debt repayment is the debt avalanche strategy. In this article, you'll learn how the avalanche strategy works and why it might be the easiest way to eliminate your debts.
How The Avalanche Strategy Works
The avalanche strategy focuses on clearing the debt with the highest interest first while still paying the minimum monthly amount on other debts. To apply this strategy, make a list of all your debts, sorting them from the highest interest to the lowest. Any extra money from your budget for debt repayment goes to the debt with the highest interest until it is fully settled.
As soon as you eliminate the priority debt, the next highest-interest debt becomes the priority debt. Keep in mind that while you make the highest-interest debt your priority, you still need to keep paying at least the minimum monthly payment on the other debts. The avalanche strategy helps you minimize the amount of interest you accumulate on your debts as you try to repay them.
Here is a clear illustration. Let's say you have $2,000 extra to add to your debt repayment in July, and you have the following debts:
$8,000 credit card debt at 17.50% annual percentage rate (APR).
$12,000 student loan at 3.70% APR
$6,000 house loan at a 2.50% APR
Applying the avalanche method, the credit card debt becomes the priority debt because it has the highest interest, meaning the extra $2,000 goes to it. The loop continues until you clear the credit card debt and switch your focus to the student loan and finally the house loan.
However, to achieve the best results using the avalanche strategy, you must apply discipline and consistency. You can get a debt repayment calculator to help you analyze when you'll pay off your next debt and keep you accountable at most.
Advantages and Disadvantages of The Avalanche Method
The avalanche strategy has some benefits and, of course, some downsides too.
Pros
It helps you minimize the cost of interest on your debt.
It drastically reduces the time it takes to be clear from debt.
It provides a more structured approach to paying off debt.
Clearing your highest debt first can give you some motivation to clear others.
Cons
It requires great discipline, commitment, and consistency. This can become a challenge if you do not have a stable source of income
It requires extra money to add to your debt repayment schedule.
It can be extremely difficult and stressful to sustain motivation.
Conclusion
The debt avalanche method gives you a simple, easy-to-use payment structure. If you have had a problem coming up with a repayment plan on your own, the debt avalanche can be your game-changer. When you apply this strategy with discipline and consistency, you can be sure you'll become debt-free sooner than later.
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