Finding a way to eliminate debt fast and efficiently usually means using the debt avalanche approach. This method is based on interest rates and numbers alone, meaning every dollar you invest in paying down your debt will be helping to reduce your overall interest costs over time, i.e., making the mathematics work for you while you can work toward becoming debt-free. This means mathematically, this method is likely your quickest option for getting out of debt; however, feeling like it’s your easiest way to get out of debt may be two different things, and that’s where things get fun.
Why Do Some People Prefer The Debt Avalanche Approach?
The concept behind the debt avalanche method is very simple: instead of paying off the smaller debts before paying off the larger debts or using a variety of payment methods, you are only going to pay off, first, the debt that has the highest interest rate.
First, you will make a list of all your debts according to their order of interest from highest to lowest; then you will make the minimum payments for all of your debts except for the top one. Then as you make these required payments you will use all of the extra income and allocate it to the debt that has the highest interest until that debt is paid in full. Once you have paid off the debt with the highest interest, you would then begin applying all of your funds toward the next highest interest amount.
By paying down your debts using this strategy will not only save you money on interest over time but also allow you to pay off your debt at an accelerated rate.
Due to its merits, experts highly recommend this method as well.
A Logical Approach to Debt Management
A very interesting thing about the debt avalanche method is that there is no emotional attachment involved. All that exists is reason… therefore, it is not necessary for us to get caught up in being emotionally satisfied with paying off an easy-to-manage, smaller amount of debt with an extremely low interest rate just because it feels good to you.
Instead, you will want to focus on paying off the high interest debt first, regardless of how long it may take to do so. You could be waiting a long time — weeks, months or years to pay off that large high-interest, high-cost debt while the smaller debts on your list will continue to be outstanding and will continue to seem like they are not moving (but they are moving gradually behind the scenes as you will be reducing your total interest amount as you pay off the more expensive debt first).
You can think of the same analogy as making sure you are addressing the largest hole in your sinking boat before you try to address the smaller holes.
The Hidden Advantages Most People Don’t Recognize
The most significant benefit of implementing this method will be the interest saved over time.
Interest is the covert assailant of our general obligation. Left unchecked, the amount we owe will keep getting larger, and the time it takes to pay back what we already owe gets longer. Making the highest interest on debts your top priority is an effective method for reducing that pressure as soon as possible while enabling more of your income to work for you rather than making monthly payments to lenders.
Over time this strategy will save many hundreds or possibly even thousands of dollars.
The use of this strategy also assists us in developing a strong sense of self-discipline financially, as we will develop the habit of consistently making timely payments which will help us keep our eyes on long-term goals versus short-term results.
Being able to develop that sense of self-discipline has been a significant component for many individuals in their ability to ultimately becoming free from debt.
Unfortunately for some individuals the debt snowball method doesn’t always yield the same positive results.
While the debt avalanche method may have a mathematically logical basis; for some individuals, it may not be the most inspiring technique.
When an individual does not see immediate results on their efforts they often lose their momentum to complete their task. Paying off a large obligation, which is at a high rate of interest, can feel like it is taking forever and without seeing any visible progress an individual can very easily lose motivation to continue their efforts to pay down that debt. Some people prefer to use other methods to pay down debt that provide quicker psychological rewards.
Finances are not solely about the numbers; it is also about our behaviour and how we view money.
Therefore, a plan that looks like it will work on paper may not work out if it proves too difficult to execute in our day-to-day lives.
This is why your decision on how to pay off debt typically will be based more on your personality and discipline than on what math shows you.
For example, let’s say you are in debt to three different creditors: a credit card with high-interest; a personal loan at a moderate rate of interest; and a student loan at the lowest rate of interest.
If you use the avalanche method, you would begin to pay off your credit card with the highest interest first, while continuing to make only the minimum payments on your personal loan and student loan until your credit card debt is eliminated. Once that occurs, then you will start to pay your personal loan debt. At that point, you will start to pay your student loan debt.
The sequence of the debt avalanche keeps ordering of your payments so that you pay off your most expensive finance charges first to reach your goal of being completely debt-free.
Although the process of paying off debts may not seem thrilling at first, in the end, this method of attacking your debt will help you to become debt-free in the shortest time frame possible.
Once you begin using this method, it will work very quietly and continuously achieve the end result of eliminating your debt.
The Importance of Discipline
Remember, the best way to pay off your debts is to follow through with an effective plan. The avalanche method is definitely an effective way to pay off your debts, but it’s important to have discipline, patience and consistency. Without these three traits, no payment plan you create will be effective. In addition to having a good payment strategy and making regular payments towards your debts, avoiding new debt and having a clear outline of your payment plan is much more important than choosing the “best” payment method.
Often times, accomplishing a goal requires more than just having an idea, however; it also requires having determination to follow through on your idea.
Achieving success by following through on a simple plan will produce greater success than having abandoned a complicated one halfway through completion.
The debt avalanche is an efficient method for paying off debts, as it pays off the debt having the greatest interest first, which reduces the total interest cost for the use of the money and creates the fastest mathematically calculated path to being financially free. Although it requires you to exercise patience and discipline, this method is one of the most effective methods to eliminate debt.
Paying off debts is more than just about being fastest; it is also based on selecting the method to pay off your debts so that you are able to continue to make progress toward paying off your debt until you have a zero balance.
