What is the fastest way down a mountain?
Let’s apply an avalanche to your mountain of debt and see what happens…
Serious note: Each year avalanches kill more than 150 people worldwide every year. Read more on avalanche safety and facts on National Geographic‘s site.
Here’s how the Debt Avalanche works.
- Order your debts from highest interest rate to lowest.
- Pay the minimum to all debts every month.
- Throw all extra cash you have to your debt with the highest rate, until it’s paid off.
- Repeat every month.
Before this can work for you, you must create a budget and stick to it.
A budget gives every dollar a destination, makes your money work harder for you, and frees up cash that you will need to pay off debt. Once you’ve got a budget working for you, AND you have $1,000 saved for rainy days it’s time to start your debt avalanche.
Write down the rate you pay on each debt, and the minimum payment.
If you’ve never paid much attention to your interest rates, get ready to have your eyes blown opened.
This is the only time I ever advise paying just the minimum payments. Add up the minimum payments due on everything, and then look at your budget and decide how much additional you can pay towards your debt.
Let’s say you have three debts: A personal loan for $300 at 15%, a credit card for $1,000 at 24%, and an auto loan for $8,000 at 5%. That credit card is now your primary focus because it’s got the highest interest rate. If your budget allows you to put $200 additional towards your debt, it will go on your credit card until it’s paid off. THEN, you will add the credit card’s minimum payment and the $200 to your personal loan. Rinse, repeat, until debt free.
Keep paying off debts and moving the minimum payments AND your cash onto the next debt until everything is repaid.
Pro Tip: Struggling to save $1,000 for emergencies? Put it FIRST in your debt avalanche until it’s fully funded
Fair Warning: Although this is one of the cheapest and fastest ways to get out of debt, it’s going to take some time to feel that “victory” of paying something off… especially if your highest interest rate debt is the largest. Check out this Debt Avalanche Calculator to spell out exactly how quickly, and affordably, you can pay off your debts. It will also help keep you focused by watching your debts shrink every month.
If you grow exhausted of the sacrifices you’re making to pay off your debt, it’s possible that you will be tempted to quit. If you do, all the money you’re going to save will be thrown out the window, and you will be in debt for much longer.
Trust me. Stick with your debt avalanche.
There are many tricks and tips to become debt free, but the debt avalanche method is single most important tool I am using to pay off my $125,000 mortgage in a little over six years.