5 Ways to Make Extra Cash in 2021

Last year, the pandemic put the importance of saving money into perspective. Layoffs and furloughs due to the lockdown launched many people into new careers or left them thinking what's next. This year, though we can see the light at the end of the t...

  • Budget
  • Debt
  • by:The Thinkflow Team on: January 20, 2021

What Is the Debt Avalanche Method? Is It Right For You?

Facing a mountain of debt, especially one with high-interest credit cards, can feel super exhausting. But hey—if you're ready to knock it out, we have a strategy that can help you save money in the long run. It's called the debt avalanche, and we're ...

Facing a mountain of debt, especially one with high-interest credit cards, can feel super exhausting. But hey—if you're ready to knock it out, we have a strategy that can help you save money in the long run. It's called the debt avalanche, and we're going to break it down for you. 

What Is the Debt Avalanche? 

The debt avalanche is a debt payoff strategy in which you pay your credit card or loan with the highest interest rate first, regardless of balance. The idea is that by eliminating high-interest debt sooner, you'll pay less interest over the long term, which, in turn, saves you money. 

For example, let's say you have three balances you want to pay off: a $1,200 personal loan with an APR of 16.74%, a $12,600 car loan with an APR of 6.20%, and a credit card of $4,500 with an APR of 23.54%. Under the logic of the debt avalanche, that credit card's APR is stealing your wealth: eliminate it first, and you'll end up paying less for that debt.

How Does the Debt Avalanche Work? 

Thankfully, the debt avalanche isn't super complicated. As with most payoff strategies, the challenge emerges from staying disciplined and continuing to pay debts until they're gone. In sum, here's how you can start implementing the debt avalanche today. 

1. List out your debts from highest interest rate to lowest. 

In a spreadsheet, or on a sheet of paper, order your debts by highest APRs or interest rates. Be sure to include minimum payments, balances, and due dates with each debt. 

2. Pay the minimum on all debt.

Even though you want to knock out high-interest debt first, you still want to pay at least the minimum on your other debts. So, once you've ordered them, calculate how much you'll spend by paying the minimum on each one.  

3. Put whatever money is left toward the debt with the highest interest rate.

Now comes the fun part: after you've made minimum payments, pay everything you can on that high-interest debt. Don't hold back here—this debt is stealing your wealth. If it means getting a second job or a side gig, by all means, do it (you can even use our Income Helper to find side gigs near you).

4. When you pay off that debt, move to the next highest interest rate.

Once you've paid off your first big debt, do something to celebrate. That's a big deal, and you should feel proud of yourself for doing it. Then, take all the money you were using for that debt and throw it at the next debt with the highest interest rate.  

Tip: Avoid the pitfall that a lot of people fall into where they lower the total amount they put toward their debt each month. Be sure to put both the minimum for the last loan and the extra amount all toward the next debt.  

5. Repeat until you've paid off all your debt.

Once you've paid your second highest debt, keep moving down the list until you've eliminated all debtAt that point, you should definitely do something to celebrate: you're debt-free, meaning you're a step closer to financial security. 

Is the Debt Avalanche Right for You? 

The debt avalanche may be the most cost-efficient method for paying down debt, but here's the thing: it takes a lot of discipline to see it through. Because your highest interest loans may have high balances, too, it could take months, even years, before you've paid the first one off. And if you tend to lose motivation quickly, you may give up before the fight is over. 

But if you're patient and determined, the debt avalanche will help you lower overall interest payments, which in the end saves you more money. 

How Does the Debt Avalanche Compare to the Debt Snowball?

But what if you do tend to get discouraged easily? 

Well, in that case, you may want to try the debt snowball. 

The debt snowball works like this: instead of ordering debts by interest rate, you order them by their balance. And, instead of listing them from highest to lowest, you list them from lowest to highest.  

So, taking our example from above, let's say you have a $1,200 personal loan with an APR of 16.74%, a $12,600 car loan with an APR of 6.2%, and a credit card of $4,500 with an APR of 23.54%. With the debt snowball, you don't care about interest rates. You want to knock out the lowest debt first, which in this case is the personal loan, regardless of how much more you'll pay in interest. 

Why would you do that? It all comes down to one word—motivation. When you knock out that lowest debt, you feel a sense of accomplishment. And because, hypothetically, you're moving faster through your debts, you feel like you're making more progress. 

In sum, if you need small wins and immediate success to keep you motivated, use the debt snowball. But if you want to pay the least amount of interest, saving you thousands of dollars, try the debt avalanche. 

Get the Right Tools for Any Debt Payoff Strategy. 

Here's the thing—no matter which strategy you choose, Thinkflow can help you stay focused on your goals. Our free tool helps you visualize your finances, so you can solve cashflow problems before they get bigger. Try Thinkflow today, and let's take control of your financial future. 

 

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