Debt strategy can be very difficult – it’s an emotive and stressful topic and so creating a plan that works for you can be difficult. There are some simple frameworks and strategies that you can use to help you get started. The two most common methods of debt consolidation are the debt avalanche and the debt snowball.
If you follow the debt avalanche strategy then you will repay debts with the highest interest rate first. This can save you money on interest in the long run.
If you compare this to the debt snowball method, the snowball method aims to pay off the smallest debt first before then moving on to the next biggest, etc. This method prioritizes momentum and small victories on the way to getting debt free. If you need small consistent victories to keep you going then this method could be the right one for you. If you are analytical and understand that paying off the high interest first is the smart move, then the avalanche method could be for you.
How To Use The Debt Avalanche Strategy
If you are struggling to pay off unsecured debts in under five years (this could be credit cards or even personal loans) then you might need to look into debt relief.
However – if you can repay these debts in under five years with a robust budget and some diligence, then the avalanche strategy could be good for you. The start is always to get a hold of how much you owe, and to whom.
Add up every minimum that you owe on these debts (excluding mortgages or rent) and then rank them in order of highest interest rates to lowest. Then create a budget to see the maximum amount you can put towards debt each month. Any extra money that you can put towards it will help accelerate your debt repayments.
Here’s an example:
The goal is to continue to pay off debts one by one until it becomes a manageable amount each month or you become debt free. If any of your debts have promotional rates that then end, you might need to reorder your existing debts to keep this in mind. You always want to focus on which debt has the highest interest rate and really put your focus on that.
The avalanche and snowball methods both use budgeted money to repay debt. However, there might be situations where you find extra money in your budget or day-to-day that you can then use to pay off some of this debt. You can use this money as a supplement to whichever strategy you have chosen.
Is The Avalanche Method The Right One For Me?
The avalanche method will if followed correctly, save you money in the long run because you are focussing on the debt that costs you the most each month. However, this also means that it might be a long time before you pay off your first debt, especially if the debt with the highest interest rate is also the largest.
You won’t get that dopamine hit like you would with the snowball method. The snowball method will help pay off smaller debts quicker because it focuses on the smallest amount first. It also gives you the satisfaction of paying off some debt.
If you want to track your debt in a spreadsheet this could help you keep on track. It will allow you to see your progress and keep on track. It is important to remember however that if you fail to stick to the plan, you could undermine all the hard work you already did. This is why it needs to be manageable and something that you can stick to.