Naturally, we have a lot of questions when we’re planning to pay off our debt. And finding the right approach that works, can be tricky.
After all, all we want to do is pay off our debt as soon as possible.
The debt avalanche method does exactly that. So, what is it? And how does it work?
There are two techniques that we can use to do this. The debt avalanche method and the debt snowball method.
Both approaches work well, but if you want to pay off your debt quickly, then only one approach rises above. The debt avalanche method.
The debt avalanche approach aims to pay off all your debt in the shortest amount of time while saving on interest.
Sounds pretty good right?
Tackle your high-interest debt first and save in interest. Debt with high interest will cost you more in the long run. So, getting rid of that as soon as possible would be in your best interest.
How does it work?
The avalanche method does not look at the amounts, but rather looks at the monthly interest.
The purpose of this method is to destroy that interest as soon as possible so that you end up saving over time.
The avalanche strategy focuses on paying off debt with the highest interest first. Once that debt has been paid off, the funds are transferred to the next highest-interest balance. This process is repeated until all debt is eliminated.
Let’s put that in perspective.
Let’s say you are R100 000 in debt.
- Car loan is R70 000 at 13% interest – a monthly payment of R 3 200.00
- Credit card debt at R13 000 21% at interest – a monthly payment of R 1 210.00
- Personal loan R17 000 at 15% interest – a monthly payment of R 590.00
Using the avalanche approach, you would pay the minimum repayment on your personal loan and car loan, while pushing as much extra money as possible into your credit card debt. You’re using most of your extra money to pay off your credit card debt because it has the highest interest.
So, let’s say that your total minimum repayments amount to R5 000 per month for all your debt. After going through your budget you’ve realised that you can free up an extra R200 per month. When you use the avalanche approach, you would pay the R5 000 minimum repayments, while using the R200 extra to tackle that credit card debt.
Once you’ve paid off your credit card debt you would use that R200 plus the minimum repayment of the credit card debt to pay off your personal loan. And once that account is paid off, you would use all your extra money to pay off your car loan.
How do you get started?
Now that you understand how the method works, let’s put it into action.
You want to start by making a list.
List all your debt, interest and minimum repayments.
It should look like this;
Debt #1 Interest Minimum repayment
Debt #2 Interest Minimum repayment
Debt #3 Interest Minimum repayment
Add up all your minimum repayments. Go over your budget and see where you can cut costs and free up any extra cash. Any extra cash is great, R10, R100 or R1 000. The idea is to pay any amount more than your minimum repayments.
Once you know how much you can pay towards your debt, start by paying off the account with the highest interest.
Keep that Avalanche rolling
Once you’ve paid off your highest interest account, move on to the second highest interest account. Continue doing this until you’ve reached the lowest interest account. You will have your debt paid off in no time. And best of all, you’ll be saving on interest.
Do you need financial advice every once in a while? Subscribe today and keep your financials up to date. We offer weekly debt and money management advice, as well as budgeting and saving tips.