First it was a snowball, now it’s an avalanche?
Alright look, I didn’t come up with the names… Though you can’t deny that they’re pretty clever. Similar to the debt snowball, the debt avalanche is another organized method of paying off your debts. They’re basically the exact same thing, the difference here is that with the avalanche method, you list your debts from highest interest rate to lowest interest rate. Regardless of amount. Other than that minor detail, the concept is the exact same. Take any amount of extra cash you can find, and start knocking out your debt. Once you pay off the first debt (your highest interest rate in this case) you take that monthly payment, add it to your ‘extra cash’ and continue on just like you would in the debt snowball method.
Let’s see an example!
This is the fastest option?
Mathematically speaking, this method is going to be the more efficient of the two. I want to put together a blog post comparing the two methods so I’m not going to speak to this directly, but the short answer is yes. Since you’re knocking out the debts with the highest interest rate first, you are saving yourself money in interest that otherwise would be accumulating if you were using the snowball method. The flip side however, is that you won’t see progress as quickly in the beginning because there won’t be those low cost debts to pay off ‘quick wins’.
Is speed worth it?
That’s entirely up to you. Like I said in my debt snowball post, although this method is faster, it isn’t as encouraging since you aren’t paying off debts right from the start. In other words, you aren’t going for the low hanging fruit. You have to ask yourself what type of person you are. Do you need that immediate encouragement to keep yourself accountable? Or can you stay the course with the debt avalanche knowing that you’re eventually going to pay off your debt sooner? These are questions you’ll have to reflect upon and decide on your own. Regardless of method you choose, you’re still well on your way to financial freedom.