If you’re buried under significant debt, you’ll find dozens of methods for getting out from under the weight of it all. From financial counseling to credit card hardship programs, numerous techniques are at your disposal, each of which is geared toward different sets of circumstances. One of the latest strategies to make headlines approaches the matter from a unique angle. Known as the debt avalanche method, this tactic could bring down an entire mountain of debt within just a few years.
What’s the Debt Avalanche Method?
The debt avalanche method is one of many strategies for reducing the amount of money owed to creditors, and it’s known as a payoff accelerator plan. This means it could get you out of debt much more quickly than some of the other strategies out there; of course, success depends on your financial situation and a number of other factors.
With this technique, you’ll be confronting financial obligations based on their interest rates rather than outstanding balances or monthly payment amounts. Your expenditure with the highest interest rate gains top priority. While you’ll continue to pay minimum amounts on each of your other bills, you’ll allot extra money to the one with the highest interest rate until it’s paid off.
Once the debt with the highest interest rate is paid in full and out of the picture, it’s not time to go on a shopping spree or spend money on an extravagant vacation, though. Its original payment amount plus the extra money funneled into its elimination will be rolled over to the financial commitment with the next highest interest rate. This cycle continues until you’ve effectively freed yourself from loans, credit cards, and other forms of debt.
Getting Started with the Debt Avalanche Method
First, the key to triumphing over mounting monthly balances is, quite literally, laying all your cards on the table. For now, you’ll be focusing on the debts it’s possible to pay off over time, such as credit cards, store charge accounts, medical bills, auto loans, mortgages, and personal loans. Other unavoidable outlays, such as food and necessities, utilities, and insurance will be left out of the mix at this point, but they’ll certainly come back into play later on.
As mentioned, you won’t be examining total balances or monthly payment amounts. Interest rates are the factor you’re looking for here. Make a list of your individual debts, arranging them from the highest interest rate to the lowest. You can enter them into a spreadsheet, write them in a spiral notebook, or use any other method you like for keeping track, as long as you have a complete list for reference.
At this point, it’s worth mentioning an option many people either inadvertently overlook or intentionally avoid. Consider calling the creditors on your list and simply talking to them. From credit card issuers to loan providers, some are willing to compromise with customers on interest rates, especially if you’ve done your homework and can list a few companies offering better terms. This isn’t always a fruitful endeavor, but it could potentially pay off. If it does, be sure to rearrange your list accordingly.
Digging Deeper into the Strategy
After you’ve ordered your debts by interest rate and, therefore, by priority, it’s time to start doing a little deeper math. Total up your minimum monthly payments to get an idea of exactly how much it takes to cover those bills each month. Then, subtract that sum from your total monthly bill allotment to find out how much extra you could potentially earmark for the one you’ll be paying off first.
As you might imagine, the more money you allot to that first-priority payment, the faster it’ll crumble away into oblivion. Keep in mind, though, you’re still making minimum payments on other debts, so they’re not to be overlooked. Failing to pay those per their pre-arranged schedules could result in higher debt over time, which is the opposite of what you want to do.
At this point, one common question lingers on numerous people’s minds: How do I allocate extra money to a specific bill each month if I’m already maxed out on my finances? This takes a certain amount of planning and revisiting a previously touched-upon topic.
Where Will My Extra Bill Money Come From?
As alluded to earlier, getting the debt avalanche plan to work requires looking at your to-be-paid-off expenses as well as those you’ll never really eliminate. Plenty of efforts can help pave the way for extra monthly funds, but they all revolve around scrutinizing your monthly spending habits.
Cut Down on Your Power Consumption
Electricity is something we all need these days, with the small exception of those who choose to go off the grid. Unless this is a possibility for you, reducing some monthly expenses could be as simple as raising or lowering the temperature on your thermostat. Additionally, stay away from tiny loads of laundry; instead, go for those that fill your washer and dryer to their capacity, unless it’s an absolute emergency. Switch from incandescent light bulbs to compact fluorescent and LED versions, and be sure to turn off lights when you leave the room. Even the most miniscule step can go a long way toward lower power consumption and the subsequent reduced monthly electricity costs.
Eat Food from Home
After taking a closer look at their finances and spending habits, most people are stunned to realize just how much they fritter away going out for breakfast, lunch, dinner, and coffee. Though each purchase on its own may not be incredibly costly, they really add up over the course of a month. By cutting out just two coffees and two lunches each week, you could stand to save an extra $100 or more per month, and those savings are sure to make a huge dent in your top-priority bill.
Cut Back at the Supermarket
Most people have their favorite name brands of coffee, cereal, soda, and other staples, but store brands shouldn’t be left out of the mix if you want to save a few bucks. They tend to provide equal quality at a much lower price. At the same time, it certainly pays to take advantage of store sales and price-match offers. Don’t be hesitant about clipping coupons, but be sure they’re for items you’d normally buy; otherwise, it’s a counterproductive measure.
Set a Budget for Everything
Creating a cut-and-dry budget holds a great deal of power when it comes to keeping spending in check. This certainly rings true in terms of groceries and household items, but they’re not the only aspects to consider. Whether you’re looking at weekend entertainment alternatives, saving yourself the trouble of cooking and cleaning the kitchen once or twice a month, or any other potential outlay, always hold yourself to strict spending guidelines.
Cut Out Things That Aren’t Necessary
Speaking of weekend entertainment options and dinners out: are they truly necessary? Would staying in, making a sandwich, and watching one of the free movies available through your cable or satellite provider be so bad? Do you really need the premium TV package, or might the basic plan suffice? Most people who’ve made small changes like these insist that paying off their debt in a much shorter amount of time is well worth those little luxuries they’ve given up along the way.
Become a Do-It-Yourselfer
Obviously, some tasks are best left to the professionals; still, there’s ample money to be saved by doing certain things yourself. Watch a video or get advice from home improvement stores on patching an unexpected hole in the wall. If you want to refresh your family room, buy the paint and supplies and make it a family project. Change the oil in your car at home rather than taking it to a shop. You’re bound to save money by taking the DIY route, and the satisfaction you’ll get from a job well done is worth far more than financial gain alone. If your efforts happen to go awry, it’ll be a funny story to look back on in a few years when you’re debt free, sipping margaritas on a beach in Cozumel.
Clean Out Those Closets
Do you know exactly what types of finds are just sitting in your closets, garage, jewelry boxes, attic, or storage room? Most people are shocked once they start taking inventory. Hundreds, if not thousands, of dollars in treasures could be lying around your house taking up space and collecting dust. Devote a couple weekends to a thorough spring-cleaning and have an old-fashioned yard sale. Of course, plenty of websites exist these days specifically to help people sell unwanted items.
Shop for Wireless Service
Having a cell phone is nearly a necessity in this day and age, but the cost seems to be surging out of control. Consider switching from one of the major names on the market to a local service reseller. They may not be as high-end as the top companies are; however, they typically purchase their coverage from one of them, so the coverage is of comparable quality. Since they buy in bulk, they get discounts and pass savings along to their customers. Prepaid service may also be worth considering. It’s not an ideal route for everyone, but some could certainly benefit from this option. Look at the wireless providers in your area to find the best prices and coverage.
Compare TV and Internet Services
While cutting back on your cable package might save a little money each month, you may not need to. Call around to various local providers to get a better understanding of the prices, packages, and special offers available. You may find superior options for reduced rates by simply seeing what’s out there. Some even decide they don’t need these services at all and cut out this monthly expense entirely. This doesn’t ring true for everyone, but it’s worth giving a little thought to.
Take on a Few Odd Jobs
Not everyone has the time to add extra work into their lives on top of their families and careers, but a number of people find it’s a viable solution. Offer your services as a dog walker or babysitter. Run errands for those who can’t do so themselves or don’t have the time in their own busy schedules. Plenty of side hustles are out there for the taking; and, as fate would have it, an extensive selection of websites and apps happen to pride themselves on bringing together those who want random work and those who need an occasional helping hand.
Re-examine Your Insurance Coverage
Many people find a satisfactory insurance provider and stick with it for the sake of continuity; unfortunately, many ultimately lose out by doing so. Compare rates and coverage options in your area to be sure you’re actually getting the best possible prices for home, auto, health, and life insurance. Keep in mind that you can often find better rates and more discounts by calling local providers than you would via online quotes. It may be clichéd, but a few minutes of your time really can save a great deal of money.
Downgrade Your Vehicle
Obviously, allowing a vehicle to be repossessed to save money on payments isn’t a good idea because it would send your credit score into a downward spiral. Having said that, if your lease is nearing its end, consider purchasing an inexpensive runabout instead of renewing those higher payments. Plenty can be said for having a paid-off vehicle rather than shelling out $300 or $400 or more each month on a shiny newer model with interest to boot. Insurance coverage, taxes, and tags tend to be a good bit less expensive on older vehicles, too, not to mention the inherently lower cost to repair a less technically advanced vehicle.
Switch over Your Credit Card Balance
Numerous card issuers offer reduced interest rates and $0 balance transfers to customers with acceptable credit scores. Do a little research and see if an offer like this may be available to you. Proceed with caution, though. Most of these fee-free transfers and rock bottom interest rates are introductory offers, so paying off the transferred balance before those special terms expire is imperative. Failure to do so could leave you paying more in interest than you already were. Be sure to read the fine print before taking any actions.
These are only a few of the ways to reduce current expenses and add extra funds to your payoff efforts. Don’t be afraid to be creative, and don’t hesitate to shop around on everything. You may already be enjoying the best deals available, but it never hurts to check out the alternatives. Any way you slice it, there’s always room to cut corners and save money.
Doing the Math from a Traditional Perspective
Interest has a way of adding up over time; in fact, it’s the most significant hurdle most people face when trying to free themselves from debt. Imagine taking out a $10,000 loan at 15% interest per year. Your agreed-upon term is three years, and monthly payments run you about $347 per month. After all is said and done, you’ll actually be paying back almost $12,500. You’ll be held accountable for around $2,500 more than you originally got out of the deal.
Now, consider credit cards for a moment. Say you carry a $7,000 balance on a credit card with a 19% interest rate. You make only the minimum payment each month with the standard going rate being 2% of the balance.
In the grand scheme of things, minimum monthly payments are about $140. This doesn’t sound incredibly overwhelming, but the true kicker comes in the long-term sense. At just the bare minimum, it’d take you almost 53 years to pay off that one credit card. How much would you be shelling out on interest over the course this payoff? Surprisingly enough, it would add up to almost $25,000.
While this figure may seem extreme, it’s not far from the norm. According to a recent report from credit-reporting agency Experian, average Baby Boomers and members of Generation X carry just under $7,000 worth of credit card debt. Interest rates can range anywhere from the rare and elusive 0% to upwards of 26% or more. Current national averages come in at slightly less than 16% based on certain rundowns of the credit card industry.
Crunching the Numbers from the Debt Avalanche Angle
Let’s look at what the debt avalanche method could do to transform those numbers. Using our previous two examples, you’d definitely be attacking the credit card first. Perhaps you finagled your finances enough to put an extra $100 toward those monthly payments. With the added $100 per month, your payoff time would be trimmed down to less than four years. Are you ready to see the amount of interest you’d shave off your overall debt? How does a savings of more than $20,000 sound? For those few years, you’d be paying less than $2,500 in interest.
From there, you’d move on to the $10,000 loan. Original payments were $347 per month, so you’d add the $240 previously funneled into the now-eliminated credit card to that amount for a grand total of $587 per month. With those newly boosted monthly payments, you’d only pay about $1,300 in interest, and you’d cut your payoff time almost in half. Even better, you’d then have almost $600 in additional funds to put toward yet another debt on top of the payments you’re already making on it.
Where Do Savings Accounts Fit In?
Financial experts the world over preach the power of setting aside money for both the present and the future. They’re not wrong. Having money in reserve helps to keep you prepared for life’s little emergencies, while planning for the future ensures you’re ahead of the game once retirement rolls around. Still, there are exceptions to every rule.
Ideally, you should have at least $1,000 in an emergency savings account before dedicating the bulk of your income to the debt avalanche method. This fallback fund will go a long way toward keeping you on track with your debts even in the face of home, vehicle, and appliance repairs as well as portions of unexpected medical expenses not covered by insurance and other small-scale predicaments. Diverting a little extra cash into this reserve along the way is certainly encouraged.
When it comes to retirement savings and other larger ventures, though, this isn’t necessarily the case. In general, focusing on immediate debt reduction tends to be more fruitful than concentrating on the long-term. For most people, the amount of interest thwarted by eliminating debts using the avalanche approach will easily overshadow any potentially accrued in a savings account or investment fund.
Plenty could be said for finding a happy medium, but it’s not always possible in the face of significant debt. Since you’re tackling your debts with the highest interest rates first, working in a minor retirement plan revival later on in the process could be a viable option. As you reach those debts with the lowest interest rates, consider allocating a little more to your savings. Then, once you’re out of debt entirely, you can approach retirement accounts with renewed vigor.
Don’t cash in on any retirement savings or emergency funds already in tow for the purpose of setting your avalanche into motion, but refrain from devoting full-blown attention to either once the wheels are in motion. Like the venture itself, this is bound to pay off in the end.
Keep in mind that this is a general rule of thumb. Everyone’s finances and circumstances are different. Take a thorough look at your unique situation before setting your decision in stone.
Does the Debt Avalanche Method Really Work?
As is the case with most endeavors, you get out of the debt avalanche method what you put into it. Starting by funneling extra money toward your expenditure with the highest interest rate is crucial to the entire process. Further your efforts by taking the money allotted to that debt once it’s eliminated and rolling it over to the payments with the second highest interest rate, and so on. It’s a cycle, and the only way to succeed is by developing a plan and remaining dedicated to it for the long haul.
While you’re tackling those debts from the top downward, it’s important to avoid opening new credit card accounts or financing additional ventures along the way. Yes, emergencies do arise. Washing machines break down, and home repairs not covered by insurance or warranty are bound to creep into the picture when you least expect them. For this reason, having a savings account or dedicated emergency fund is bound to make a world of difference. Turning to either of these as your source of extra money for monthly bills would be setting yourself up for failure.
As long as you stick to your guns, though, the debt avalanche method should work in your favor. That said; it’s not the right approach for everyone. If you’ve analyzed your finances and taken every possible step to minimize unnecessary expenditures, and you still find yourself struggling just to make ends meet, then other alternatives would probably serve you best.
What Are the Alternatives?
Several alternatives to the debt avalanche method exist, each of which is geared toward specific financial needs and circumstances. If you’ve fallen behind on some of your monthly outlays or just can’t work any wiggle room into your budget, debt settlement may be a more viable solution. With this approach, a professional go-between will negotiate with your creditors in an attempt to convince them to accept less than you actually owe.
Debt settlement helps reduce monthly expenses, but it could have a negative impact on your credit score in the end. At the same time, not all creditors are willing to settle. You’ll still be responsible for the full amount owed to those who turn down offers from your mediator.
Bankruptcy is also a commonly sought-after escape for those who are having trouble making ends meet. As is the case with debt settlement, it can be an effective way out, but it does come with steep credit ramifications. This solution should only be used as a last resort. For those who can cover their debts, it’s an imperfect course of action. In truth, it’s typically not even an option for people who don’t meet certain income prerequisites and can’t prove they’re experiencing financial hardships.
Another option would be a debt consolidation loan. This alternative entails taking out a sizable loan and using it to pay off all your other debts. In turn, you’re left with a single monthly payment rather than numerous ones. While a consolidation loan could effectively eliminate much of your debt as well as high interest rates, it doesn’t always work out in the debtor’s favor. Many find themselves paying even more interest in the end than they would have through other techniques.
Determining whether this is a beneficial option requires a great deal of in-depth math and shopping around for the best terms and interest rates. Though this solution shouldn’t be completely ignored, it should be approached with caution.
A Closer Contender
When comparing debt elimination alternatives, the avalanche approach could be most closely compared to the debt snowball method. In contrast to the avalanche, the snowball entails first tackling your debt with the smallest balance rather than the highest interest rate. Both strategies involve paying off one debt and rolling over its payment amount to the next one on the list while applying the minimum to others in the mix.
Using the debt snowball method does have certain advantages. Since it deals with the smallest balance first, progress comes about a good bit faster than with the debt avalanche method. For those who need near-immediate gratification, this is a definitive plus. On the other hand, reaching full-blown financial freedom tends to take longer with the snowball method. Typically, you stand to save more money on interest with the avalanche than with its closest competitor, as well.
If you’re fully capable of covering all your monthly expenses, and allotting extra money to debt payoff is a possibility, then don’t hesitate to weigh all your options before making a final decision. Debt calculators are readily available online, and they’re set up to examine your outlays from a number of different angles. Do the math and see for yourself which one might benefit you the most.
In the event exorbitant interest rates aren’t an issue for you, the snowball may be more advantageous. If you have access to a loan with the right terms and rates, debt consolidation could be the answer. Otherwise, give the debt avalanche method due consideration.
All Things Considered
Plenty of options are available for reducing your outstanding debt. As a payoff accelerator plan, the debt avalanche approach could certainly put you on the fast track to financial freedom. Eliminating that first high-interest debt may be a slow and painstaking process, but it’s typically a downhill battle from there. Keep your eye on the ultimate prize, and don’t get discouraged before giving the avalanche a fair chance.
Success through this strategy is based upon dedication and determination, as well as a little extra capital to kickstart the process. Chances are strong that if you look hard enough, those added funds may very well be right under your nose. Just don’t turn to your emergency stash or retirement funds for the initial investment. Try not to overthink savings accounts as you’re paying down your debts; building up your financial reserves will come in due time.
Taking down your mountain of debt isn’t an effortless venture. It requires planning and even some major sacrifices along the way. Those who’ve seen the debt avalanche method through to completion unanimously agree that it’s well worth any trivial elements you might have to give up for a short time, and the rewards you gain in the end will more than bridge the modest gap.