The burden of debt can be crippling, and I applaud anyone who is in the process of repaying it. Whether you owe a little or owe a lot, you should know about the debt avalanche method.
The debt avalanche method is a strategy to help you pay down debt. The plan of attack with this strategy is that you review all of your debts, and focus your efforts on paying off the highest-interest debt first. After this, you pay down the next highest-interest debt and so on.
The focus of the debt avalanche is to get rid of the most costly debts you have first. By strategically reducing your interest payments, you will be able to reduce the total amount of interest you pay across all of your debt.
How does the debt avalanche method work?
There are many ways to pay down your debt and let’s be completely clear. If you’re working towards paying down any debt, you’re doing great. Keep going!
The debt avalanche strategy concentrates your efforts on the highest-interest debt before anything else.
When you review any debts you have, check the interest rate for each of these. You’ll see the annual percentage rate (APR) which is the interest charged you have on any debt held with that company. In a spreadsheet or on a bit of paper, write down the debts in order with the highest APR first and the lowest last.
Let’s say the highest APR on a credit card balance you have is 21% APR. This is where we’ll put our attention first. Any additional money you save from your budget or earn from a second job or side hustle should be put towards paying this debt down as quickly as possible.
It’s important to note that you still need to make at least the minimum payments on the other debts you have to ensure you do not add additional charges to those debts.
Once the highest-interest debt on the credit card is paid in full and this debt is cleared, you move on to the next debt on your list. Looking at the example above this could be a personal loan with 15.49% APR. We continue with the same level of effort and focus to paying down each of our debts, so any money or income you were putting to pay down the highest debt can now be directed toward the next.
As the first debt is no longer being repaid, the debt “avalanche” rolls downhill gathering momentum with each debt repaid and speeding up the repayment of the debts with lower interest rates.
The debt avalanche method is one of the efficient ways to pay down debt as it reduces the total amount of interest you’ll pay most efficiently.
As before, it is important to continue making the minimum payments on all your other debts to ensure you are not adding late or other charges.
What debt to include in a debt avalanche
Not all debt is equal and the type of debt we include in a debt avalanche strategy needs to be considered. Many of the common debts included are:
- Personal loans
- Credit Cards
- Buy Now Pay Later Loans (Klarna)
- Car loans
Mortgages are generally treated separately from the above types of debt. However, once you pay off any of the above, some of my personal financial coaching clients choose to pay off their mortgage while also investing for their early retirement.
How to start using the debt avalanche strategy to pay down debt
The debt avalanche strategy is not only effective but incredibly simple to plan and implement. It can be done in just five steps. These are:
- Make a list of all your debts. Writing these down on paper
- Rank these debts based on the interest rate associated with each
- Review your budget and plan to allocate as much of this as you can to pay down the first debt.
- If you plan to increase your income, start working on this immediately and use any additional money towards the debt also.
- Once you’ve paid off the first debt, the same intensity should be applied to pay down the next highest debt until all of these are paid off in full. The avalanche method means that you also put any money you were paying to the highest debt get added to the other money you are using to pay off the second debt and so on until all debts are paid off in full.
Debt avalanche example
In this example, we’re showing four “normal” debts you might hold and showing how you can approach these as part of a debt avalanche strategy.
They are ordered from top to bottom based on the interest rates associated with each.
| Debt | Balance | APR | Monthly minimum |
| Credit Card | £10,000 | 21% | £300 |
| Personal Loan – Home Improvements | £4,000 | 17.99% | £120 |
| Student Loan | £8,000 | 6.25% | £200 |
| Car Loan | £6,000 | 4.99% | £149 |
In this example, the debt with 21% interest would be tackled first. When reviewing your budget or using any new income earned, any extra money should be put towards this debt first.
You must continue to pay the minimum on this loan as well as the others you are not paying down.
In the above example, if we were able to pay down £200 extra per month on the credit card debt, this would be in addition to the £300 monthly minimum. You’d make a total of £500 each month towards the credit card balance until it is paid off fully.
Once the credit card balance reaches zero and it is paid off, you move on to the next debt. Which in this example is the 17.99% APR personal loan. To maximise the avalanche you combine the £500 you were previously paying to the credit card company to the £120 minimum monthly payment for the personal loan. A total monthly payment of £620 would be used to pay off the personal loan debt.
And this process is repeated with the student loan with the 6.25% APR interest rate. Now you are paying the £620 you were using for the other debts combined with the £200 minimum monthly payment. The final debt to be paid off is the car loan with the 4.99% APR interest rate.
Just to confirm as before. You are always making the minimum payments on your other debts during the period you are focusing on the debt with the highest-interest rate.
Advantages of the debt avalanche strategy
The primary benefit of the debt avalanche strategy is that you are paying down your debt in the most efficient manner possible. By clearing the most costly debt. First, you are reducing the total amount of interest you will pay on all your debts.
Many people see benefits in this method from a mindset point of view also. It is the quickest way to repay debt and once you pay off the first and largest debt, it can be incredibly motivating to watch the avalanche continue to benefit you.
Disadvantages of the debt avalanche strategy
The challenge for many people choosing to tackle their debt using the debt avalanche method is that the highest-interest debt they hold may also be on the largest debt balance. With this in mind, it might take considerable time to pay off the first debt and many find it a huge challenge to stay motivated on a debt repayment journey.
Alternatives to the debt avalanche strategy
The debt avalanche strategy may be perfect for you, but it might also not be. Your situation is unique and the steps you take to pay down the debt will be wholly based on your circumstances. So let me say it again. If you’re making efforts to pay down debt, you’re doing great. The options I’m listing are the main strategies I have seen people use for the reasons noted. But the choice is always yours.
Debt snowball
The debt snowball is equally popular with the debt avalanche method with those looking to pay down debt. The difference is that instead of tackling the largest interest rate, you tackle the smallest debt first, all the way up to the largest.
The principles are the same. You layer the previous payments on the next debt. This method is incredibly popular as the motivational factor of seeing your debts paid off quickly helps many people to stay on track with more frequent wins.
Debt avalanche roundup
If you’re in debt, I’m rooting for you. Paying off your debt is a huge challenge and the debt avalanche does provide the most efficient way outside of a lottery win to pay down your debts.
Starting a side hustle or earning a second income is an excellent way to supercharge your debt repayment. It will mean additional work, but once that debt is repaid, the skills or the business you have built can then be used to grow your wealth.
The challenge with any debt repayments is of course that you will need to be incredibly disciplined to an age and pay down your debts over the long term. But the debt avalanche is the quickest route to doing so.
Whether you choose the debt avalanche or another method to reduce your debt the main factor is that you stick to it. There will be challenges along the way, but continuously focusing on paying down your debt is always the right choice.
If you want to compare the debt snowball method versus the debt avalanche method, we’ve also put that article live recently
