Let’s be real, a lot of us have debt. Some more than others but that’s ok.
It’s ok if we recognize that this is a problem and that we need to do something about it.
Debts will never go away unless we put our best foot forward and look for practical ways to try and contain and kill it.
Yes, you heard me right.
The first thing you need to do is to contain the situation.
Containing your debt means not acquiring any more.
No more borrowing on credit cards, from the bank or even your friends.
At some point, we all have to take financial responsibility for our actions and that starts with debt repayment.
There are different ways to pay off debt but one of the more popular ways is by using the debt avalanche method or debt stacking method.
Let’s take a look at what that is.
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What is the debt avalanche method?
The debt avalanche method is whereby you make a list of all your debts and list them in order from the highest to the lowest according to the interest rate.
The idea here is that you pay off the debt with the highest interest rate first with as much overpayment as you can possibly manage each month while keeping all other debts at minimum payment.
Once the first debt is cleared you move on to the next payment and then the next until all your debts are cleared
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How does it work?
Heres what your debt will look like:
Debt Amount Interest rate Minimum Overpayment
Credit card $900 15% $60 $200
Car loan $1200 12% $83 $0
Student loan $5000 5% $30 $0
Once your credit card loan is paid off its time to pay off your car loan whilst keeping your student loan at minimum payment.
To pay off your car loan you add the money that you are now saving each month from the paid off credit card.
Example:
The car loan debt is $1200 ( Add the repayment of $60 minimum from the credit card + $200 overpayment + $83 minimum repayment from the car loan) = $343 each month.
This is basically how the avalanche effect happens.
Once you have paid off the car loan you move onto the student loan but this time add the minimum payment ($30) to the student loan to the $343 making it $373 each month until the debt is paid.
You are basically keeping your debt pay off money the same even though you have paid them off. When you do this you stand a much better chance of paying them off earlier and saving on additional interest fees.
You are then debt free.
The benefits of the debt avalanche
The benefit of the debt avalanche is that you begin by paying off the debt with the highest interest rate first.
This means that you are saving yourself money on interest each month by simply overpaying and being able to pay less in interest fees.
This is great news as trying to save money is what we are looking for.
How does debt avalanche compare to the debt snowball method?
The 2 methods of paying back debt are very similar indeed.
The only real difference between them is that with the debt snowball method you start by paying off the smallest debt first.
With debt avalanche, you start with the highest interest rate first.
There are many schools of thought on which is better of the two and to be fair both camps have their advantages.
There still remains one vital difference between the 2 method which is really important that you should consider.
With one of the methods, there is a sense of motivation to keep going whereas the other is about the long game and having patience.
Debt snowball vs debt avalanche
Whilst both methods will, in fact, bring you to the same goal you have to note that with the debt snowball method there will be more of a desire to keep going once you see those small goals being achieved.
There is something truly glorious about finally getting rid of debt and becoming free.
The more little ones that you can knock out quickly the more inclined you will be to keep going until all your debts are paid back.
Debt avalanche, unfortunately, doesn’t give you this same motivation and that’s why I personally think that it falls a little short.
Motivation is the only thing that will keep you going when it comes to paying off debt because really and truly there is no magnificent reward waiting for you at the finish line.
Yes, you get to keep that extra cash in your pocket again once the debt is paid but what is to keep you motivated when all your friends are going out and you have to say no because you need that extra money to put towards your debt?
You either have to be really motivated ALL THE TIME or be the kind of person that never quits despite what is going on around them.
That’s tough.
Final thoughts on debt avalanche
Whilst I love the idea of paying back the debt with the highest interest rate first, I am the type of person that likes to see some results fairly quickly.
The debt avalanche method falls short for me in that area, so personally speaking, I would most likely opt for the debt snowball method.
If on the other hand, you are the type of person that doesn’t need too much motivation then I would say debt avalanche is perfect for you as you will be able to save a little more money this way.
In a nutshell, it comes down to motivation or a little extra cash.
You have to be able to make the right choice for you and stick to it.
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