Debt Avalanche Method: Get out of debt on your own and save on interest along the way
Facing debt can be overwhelming, especially when it seems to have become too large and the payment process starts to get complicated. The good news is that regardless of our situation, we can all get out of debt. There are effective strategies to free ourselves from them in the most optimal way possible and start to regain our financial well-being.
One of these strategies is the Avalanche Method, which focuses on order and efficiency to systematically eliminate debt. Let’s explore in detail how this method works and why it might be your best alternative to break free from debt.
Debt can become a financial and emotional burden for anyone, even if they have a high income level. It’s common to find ourselves dealing with multiple debts, each with different interest rates and amounts. This can create confusion and make it difficult to make financial decisions regarding the best way to pay them off. Fortunately, the Avalanche Method offers a structured approach that allows us to prioritize and eliminate debts effectively, saving money along the way.
Debt Avalanche Method: What is it about?
The Avalanche Method is based on the premise that by prioritizing the payment of debts with the highest interest rates first, the total cost of interest in the long run will be reduced, saving us time and money. Here are the key steps of this strategy:
List your debts: Just like with the Snowball Method, the first step is to list all your debts. Write down the outstanding balance, interest rate, and minimum payment required for each one. This list will help you visualize your financial landscape and determine the appropriate strategy. Do not include your housing debt, as there is no need to prioritize its payment when you have other types of debt.
Sort them by interest rate: Arrange your debts from highest to lowest according to the interest rate. The debt with the highest interest rate will be at the top of your list. We can see that the first debt is the one with the highest interest rate and the last one the lowest, regardless of the amount of the debt.
| Producto | Balance | Interés | Pago Mínimo |
|---|---|---|---|
| 💳 TDC #1 | $2,000 | 24% | $50 |
| 💳 TDC #2 | $3,500 | 25% | $50 |
| 💳 TDC #3 | $1,500 | 22% | $50 |
| 🚗 Préstamo Automóvil | $10,000 | 15% | $350 |
| 🎓 Préstamo Estudiantil | $25,000 | 5% | $250 |
Minimum Payment: Make the minimum required payment on all your debts, except for the one with the highest interest rate. In this example, you would pay the minimum on all debts except for Credit Card #1.
Attack the Debt with the Highest Interest: This is where the essence of the Avalanche Method comes into play. Allocate any additional resources you have to the debt with the highest interest rate. This approach will quickly reduce the balance and the accumulated interest cost on that specific debt.
Repeat the Process: Once you have paid off the debt with the highest interest rate, direct the freed-up resources towards the next debt on the list. Continue repeating this process until all your debts are paid off.
The greatest advantage of the Avalanche Method is that it significantly reduces the total interest cost over time. By eliminating debts with higher interest rates first, you decrease the total amount you will pay in interest, saving money in the process.
Additionally, by focusing on debts with higher interest rates, you are directly addressing the sources of highest spending, allowing you to pay off your debts more efficiently.
Considerations
It’s important to note that while the Avalanche Method is effective from a financial perspective, it may require an additional dose of patience and discipline. Debts with higher interest rates, especially if they are large amounts, may take longer to pay off while other debts remain the same, which can demotivate some people. However, keeping in mind the total savings in interest can serve as additional motivation to continue.
Ultimately, the path to financial security and independence involves making informed and consistent decisions in line with our goals. Whether you choose the Snowball Method or the Avalanche Method, the fundamental thing is that you are taking concrete steps towards a healthier, debt-free financial future.
Conclusion
The Avalanche Method is a strategy based on the logic of prioritizing debts with the highest interest rates.
This strategy will not only save you money on interest but will also motivate you to take control of your financial situation. Remember that every step you take towards debt freedom brings you one step closer to your financial goals and the economic peace you desire.
