This Repayment Method Crushes Debt One High-Interest Account at a Time

If we paid more attention to math, few of us would get into mountains of debt.

But the fact is, many of us don’t. And once we finally plug the numbers into a calculator and see the math in front of us, we’re forced to confront the reality that our debt has to go. Fast.

But where do we start?

The two most popular methods for tackling multiple debts are the debt snowball and debt avalanche. If you’re motivated by small wins, the debt snowball will usually be your method of choice.

However, those who are more interested in optimizing their payments and effort prefer the debt avalanche.

What Is the Debt Avalanche Method?

The debt avalanche method, sometimes referred to as the debt stacking method, organizes your debt payments by prioritizing debts with the highest interest rates first.

It’s best for people who don’t necessarily care about paying off individual loans quickly. It’s also great for people who like a mathematical approach, because paying off your highest interest debt first will save you money in interest over the long term (though the interest savings over the debt snowball is rarely a significant amount).

And while the speed at which you pay off your debts is more important than the order you pay them off in, it can give some people peace of mind to know they’re doing it the “right way” according to the math.

How to Use the Debt Avalanche Method

The concept may be easy, but the execution is hard. Here’s how you can get the avalanche moving in five simple steps.

1. List All Debts From Highest Interest Rate to Lowest

Start by listing all your debts. Order them from the highest interest rate to the lowest. You can record them on paper or in a spreadsheet, app or debt calculator.

You can use a site like Credit Sesame to see a full list of what you owe and to whom, but some debts you might list include:

  • Credit card debt
  • Student loans
  • Personal loans
  • Car loans
  • Unpaid medical bills
  • Mortgage-related debt

Be sure to leave out any debts outside of (or approaching) the statute of limitations for responsibility. After a certain amount of time has passed — usually at least 3 years, but it varies by state — creditors can’t sue you for unpaid debt.

Well, they can attempt to sue you… but the case will be dismissed.

Your list might look something like this:

Debt Account Balance Interest Rate
Mastercard $7,000 24.5%
Visa $2,000 18.99%
Student loans $12,000 6.5%
Car loan $7,000 3.11%

Now that you know who you owe and how much you owe them, let’s move on to what you owe each month.

2. Determine the Minimum Payment Due on Each Debt

If you used Credit Sesame to figure out your balances, you can also use it to see your minimum payments. But the numbers they provide will be estimates, so you’ll need to visit each of your accounts to get the official monthly minimums you owe.

Add those minimum monthly payments to your list.

Debt Account Balance Interest Rate Monthly Minimum
Mastercard $7,000 24.5% $200
Visa $2,000 18.99% $60
Student loans $12,000 6.5% $200
Car loan $7,000 3.11% $240

In this example, the minimum payments for all your debts equal $700 per month. That’s a big payment. If you struggle just to make those payments, look at what you can cut from your budget for a little while, or consider picking up extra hours at your job if it’s an option.

Knowing that the sacrifice is temporary can help you cut expenses and work hours you otherwise wouldn’t consider.

You could also stop paying on your debt with the lowest interest rate or your debt with the largest minimum payment until you gain some traction.

This is obviously a last resort — and not good financial advice — but it can help you knock out those high interest debts a little faster in hard times.

3. Put All Extra Toward the Highest Interest Debt

Now that you’ve figured out what you owe and have budgeted in some wiggle room, it’s time to throw that extra toward your debt with the highest interest rate.

Let’s say you can put an extra $300 per month toward debt. That would make your total available debt budget $1,000 per month. Since your Mastercard is the debt with the highest interest rate, you’ll add your $300 additional monthly payment to its minimum payment — giving you a total of $500 paid toward the Mastercard each month.

Debt Account Original Balance Interest Rate Monthly Minimum You Pay
Mastercard $7,000 24.5% $200 $500
Visa $2,000 18.99% $60 $60
Student loans $12,000 6.5% $200 $200
Car loan $7,000 3.11% $240 $240

You’ll continue making those payments until the card is paid off after 17 months — almost a year and a half later.

This is a clear example of why the debt avalanche method isn’t for people who need quick wins. If after six months you realize that it’s not for you, you can totally switch to the debt snowball. (But before you do, read on for some tips to succeed with the debt avalanche.)

4. Once It’s Paid Off, Put Extra Toward Your Next Highest Interest Debt

Now the first debt is paid off, you can add its payment (in this case, $500) to the next highest interest debt’s minimum payment.

Debt Account Approximate Balance Interest Rate Monthly Minimum You Pay
Visa $1,450 18.99% $60 $560
Student loans $9,600 6.5% $200 $200
Car loan $3,150 3.11% $240 $240

Since you’ve been paying the minimum on this card for 17 months, it doesn’t take long to finish it once you start going hard. Only three months!

5. Repeat Until All Debt Is Gone

By month 21 — almost two years in — you’ll rinse and repeat by adding that $560 to the $200 minimum payment on your student loans. This means you’ll put a total of $760 toward the student loan debt until it’s paid off.

Debt Account Approximate Balance Interest Rate Monthly Minimum You Pay
Student loans $9,150 6.5% $200 $760
Car loans $2,450 3.11% $240 $240

Theoretically, after the student loans were paid off, you’d start paying toward your next (and in this case last) debt — the car loan.

But here’s the kicker: The car loan was for less than the student loan, and it had a higher minimum payment.

So the car loan will be paid off in month 31. You’ll then finish off your student loans in month 33.

This is a unique occurrence with the debt avalanche.

Debt Avalanche vs. Debt Snowball

In our example above, we paid off $28,000 in debt and $3,576 in interest.

If we’d used the debt snowball method, we would’ve paid approximately $3,749 to interest. The debt avalanche saved us $173 in interest payments over two years and nine months.

That’s about $5 per month. When you break it down like that, there’s not much difference between using the debt snowball and the debt avalanche.

However, if you hand us $173, we’re not going to throw it back at you. Ultimately, you just have to decide which method is right for you at any given time along your debt-free journey.

If your Myers-Briggs test always produces an “F,” for example, the debt snowball method might be better for you. If you’re a “T,” you might do well with the avalanche.

This debt payoff planner app will allow you to experiment with your “payoff order” to see how each would affect your debt balances.

How to be Successful With the Debt Avalanche Method

If the debt avalanche sounds right for you, then we have a few tips to help you be successful with it.

Make your own small wins. If you like the idea of the avalanche but know you need the wins that come with the debt snowball, create your own milestones. Use a chart or other visual reminder to record your payoff and celebrate when you get to certain amounts.

As with the snowball method, we recommend you make your first few milestones smaller. By the time you finish the first debt, you probably won’t need these milestones anymore!

Be patient. You can get into debt really quickly, but it takes time to get out. Have patience and persevere through lulls and hard times. Once it’s over, you’ll barely remember them.

Keep doing the math. If you’re doing the debt avalanche method, then you probably liked seeing the savings it offers over the snowball. Don’t stop after one calculation. Continue to plug your numbers into calculators to see how much you’re saving every month. It can be super motivating.

Dana Sitar is the branded content editor at The Penny Hoarder. Say hi and tell her a good joke on Twitter @danasitar.

This article originally appeared on The Penny Hoarder