Debt Avalanche Method: Fastest Way to Pay Off Debt

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Paying off debt can be daunting, especially if you don’t have a plan.  However, with the right strategy, the path becomes clearer. 

The debt avalanche method is one such strategy and is the method that I personally recommend for paying off debt.

Although each person’s financial situation is different, when compared to similar debt repayment strategies, the debt avalanche method will save you the most money in the shortest amount of time over your repayment period.

What is the Debt Avalanche Method?

The debt avalanche method is a simple, effective way to pay off debt that prioritizes eliminating debt in order of highest to lowest interest rate. 

How to Use the Debt Avalanche Method

To use the debt avalanche method, you first need to list out all of your outstanding debt. 

This includes:

• Credit cards – each one separately
• Student loans
• Auto loans
• Personal loans
• Other debt (outstanding bills, medical debt, etc.) – list each separately

For each debt, list out the amount remaining on the debt, the minimum payment, the interest rate, and the issuer. 

Arrange the list by interest rate, starting with the highest interest rate first. 

Now pay the minimum payment on all of your debt each month, with the exception of the debt with the highest interest rate. 

Any extra money after paying the minimum payments should go towards paying down the principal on the debt with the highest interest rate. 

You’ll continue doing this until the debt with the highest interest rate is paid off in full, then start on the next highest interest rate.

Ways to Generate Extra Cash to Put Towards Paying Down Debt

A few quick ideas for generating a little extra cash to pay down debt:

• Try one of these 50+ ways to make extra money
• Cut expenses from your monthly budget and apply this to principal
• Apply any money from raises or bonuses to paying down debt
• Use tax refund money to paying down debt
• Apply inheritance to paying off debt

The list is really endless.  Any money that enters your life that isn’t already earmarked for your needs each month can be used to pay down debt. 

Debt Avalanche Example

For example, let’s assume you have $900 each month to use towards paying off debt and have the following debts:

• $50,000 in student loans at 4.5% interest and a minimum payment of $300 each month
• $2,000 in credit card 1 at 15% interest and a minimum payment of $50 each month
• $1,000 in credit card 2 at 20% interest and a minimum payment of $40 each month
• $20,000 in an auto loan at 6% interest and a minimum payment of $400 each month

To start, we need to organize this debt by highest interest rate.  To do this, I recommend a quick excel sheet with five columns: loan type, loan amount, interest rate, minimum payment, and loan issuer.

Next, either sort or filter and sort the loans by interest rate.

As you can see, credit card 2 is the debt with the highest interest rate, so we’ll tackle that one first. 

Next, add up the minimum payment column to see how much the minimum payments will be each month.  Subtract this amount from the $900 we have available each month to put towards paying off debt. 

$900 – $790 = $110

After paying the minimum payments each month you have an additional $110.00 to put towards paying down the $1,000 principal of Credit Card 2. 

Once you’ve paid off Credit Card 2, you’ll start working on Credit Card 1 since it has the next highest interest rate.  Also, in addition to the $110, you’ll have $40 more freed up each month to put towards paying off debt. 

This will continue until you’ve paid off all of your debt.

Why does the Debt Avalanche Method Work?

By eliminating the highest interest rate debts first, you’re eliminating the debt that generates the most interest each month, which allows more of your money to go towards paying down principal. 

To illustrate, let’s say you have just two loans:

• $10,000 in student loans at a 5% interest rate
• $10,000 in credit card debt at a 20% interest rate

Each month the student loans generate $41.67 in interest while the credit cards generate $166.67 in interest each month.  By paying down the highest interest rate loan in this scenario, each dollar you put towards paying off principal is four times as effective at eliminating interest for the following month. 

For instance, let’s say you have an additional $500 each month to put towards paying down principal. 

If you put it towards the student loans, the student loans will generate $39.58 in interest the following month ($2.08 less than the previous month).

If you put it towards the credit card debt, the credit card debt will generate $158.33 in interest the following month ($8.33 less than the previous month).

This may not seem like a lot at first glance, but over a repayment period of years, this can quickly add up to hundreds or thousands of dollars over the life of the loans.

Pros and Cons of the Debt Avalanche Method

Pros:

• Saves the most money over the debt repayment period
• Eliminate debt faster by reducing the amount of interest paid

Cons:

• Can be difficult to find motivation if your highest interest rate debt is also your largest balance
• May take time to eliminate the number of loans you have if your highest interest rate debt also has the largest balance

Debt Avalanche vs. Debt Snowball?

If you’re reading this, you’ve probably also heard of the Debt Snowball method advocated by Dave Ramsey.  

What is the Debt Snowball Method?

Instead of paying down the highest interest rate debt, the debt snowball method instructs you to pay off the largest balance first.

For example, let’s say you have the following debt:

• $50,000 in student loans at 6% interest and a minimum payment of $300 each month
• $2,000 in credit card 1 at 15% interest and a minimum payment of $50 each month
• $1,000 in credit card 2 at 20% interest and a minimum payment of $40 each month
• $20,000 in an auto loan at 0.9% interest and a minimum payment of $400 each month

Using the debt avalanche method, you would pay down the debts in this order:

• $1,000 in credit card 2 at 20% interest and a minimum payment of $40 each month
• $2,000 in credit card 1 at 15% interest and a minimum payment of $50 each month
• $50,000 in student loans at 6% interest and a minimum payment of $300 each month
• $20,000 in an auto loan at 0.9% interest and a minimum payment of $400 each month

Using the debt snowball method, you would pay down the debts in this order:

• $1,000 in credit card 2 at 20% interest and a minimum payment of $40 each month
• $2,000 in credit card 1 at 15% interest and a minimum payment of $50 each month
• $20,000 in an auto loan at 0.9% interest and a minimum payment of $400 each month
• $50,000 in student loans at 6% interest and a minimum payment of $300 each month

As you can see, this leads to leaving the higher interest student loans until last even though they generate far more interest than the auto loan. 

Although this could lead to paying more over the life of the loan, the main driving factor in choosing the debt snowball method is the positive affect it has on motivation. 

Debt snowball proponents argue that by paying off debt balances and therefore the number of debts faster, people are more motivated and encouraged to continue and even contribute more towards their repayment efforts. 

What are the Key Differences Between the Debt Avalanche and Debt Snowball?

Debt Avalanche Method: Quickest Way to Pay Off Debt

It’s hard to argue with the success that Dave Ramsey has had with promoting the debt snowball strategy.  He’s helped more than 5 million people pay off debt and continues to do so promoting the debt snowball method.  If you struggle with motivation and are easily discouraged, the debt snowball may be right for you.

However, I’m here to tell you that if you have the discipline, the debt avalanche method is, in my opinion, far and away the most efficient method with regard to paying the least amount of interest in the quickest amount of time.

If you’re serious about getting out of debt and want to do it as quickly as possible, you should use the debt avalanche repayment method.

What method are you using to pay off debt?  Why did you choose it?