Are you ready to pay off your debt but have no clue where to start?
Read the first post in my series about paying off your debt, then read through this series until you get to this post, our eighth in the series.
Now that you know the details about the debt snowball, which offers a psychological boost in your debt pay off journey, it’s time we discuss another debt pay off method.
The second method I’d like to introduce is called the debt avalanche.
How The Debt Avalanche Works
The debt avalanche is very similar to the debt snowball method of paying off debt, with one major change.
Instead of paying off the loan with the smallest total balance first as the debt snowball method states, you’ll instead pay off the loan with the highest interest rate first.
The debt avalanche is seen as the logically optimal way to pay your debt off in the quickest manner possible.
By paying off the loan with the highest interest rate first, you’ll lower the amount of each payment that is applied to interest at a faster rate than you would with the debt snowball.
Each payment will result in more and more money being applied to actually paying down your principal, or the amount of debt that you owe.
If this is the quickest way to pay down you debt, you might be wondering why people advocate other debt pay off methods other than the debt avalanche. Let’s take a look at the pros and cons of this method.
Pros Of The Debt Avalanche Method
- The debt avalanche will pay your debt off in the fastest manner possible.
- You know your money is being put to the best use in your debt pay off journey.
- You could save a ton of money in the long run by picking the debt avalanche over the debt snowball method.
Cons Of The Debt Avalanche Method
- The debt avalanche can result in you waiting a long time to pay off your first loan. This can be a huge psychological blow.
- People are emotional beings which can throw you off the path of the debt avalanche.
- The difference between the debt avalanche and debt snowball may be minimal for your particular debt situation.
As you can see, the debt avalanche has financial advantages, but if you can’t stick to the plan then you might get yourself in trouble.
The debt avalanche is more advantageous when your loans that you owe the most on have the highest interest rates. If your highest interest rates are on your smallest balance loans then it doesn’t make as big of a difference.
Now that you understand both the debt snowball and debt avalanche methods and their pros and cons, we’ll discuss the other options you have when choosing a debt pay off method. Read more about it here.
If you’ve paid off debt in the past, did you use the debt avalanche? If so, do you see yourself as a more logical or emotional decision maker? I’d be interested to see if any emotional decision makers picked the debt avalanche method! Let me know in the comments below!