When it comes to getting out from under a pile of debt, the sheer number of options and advice available are quite many, but let’s discuss one of them. According to the debt avalanche approach, you should start by paying off the loans with the highest interest rates. This way, you could break through the larger, more expensive debts before moving onto the lesser ones. It’s like starting with the most difficult part of a task – challenging, yet efficient. This blog will explain how the avalanche method works, why it can be a good option in particular circumstances, and how to start using it to pay off debt.

What is the Debt Avalanche?

When paying off debt, the debt avalanche method ranks your accounts according to interest rate, starting with the highest and working your way down to the lowest. This strategy makes sense because it lowers the total interest paid over time by paying off the highest-cost debts first. It matters more how much it costs you to owe that debt than how much you owe on each account. All of your debts still get minimum payments from you, but any additional funds are applied to the loan with the highest interest rate until it is settled.

Preparing to Use the Avalanche Method

Laying the Groundwork

It is imperative that you have a comprehensive understanding of your financial situation before using the avalanche method. This entails listing all of your debts and making a note of their total sums, minimum monthly payments, and interest rates. Establishing a budget is equally vital. Your income, fixed expenses, and variable expenses should all be listed in your budget. Once you have this understanding, figure out how much extra money you can afford to pay each month toward your debts. Your avalanche payment is the additional money you can throw at your highest interest loan to begin lowering the mountain of debt. 

Importance of an Emergency Fund

Without an emergency fund, embarking on a determined debt repayment strategy is like going snowboarding without any safety gear—it’s unsafe. An emergency fund serves as a safety net to keep you afloat in the event of unanticipated expenses. Without it, an unexpected medical expense or auto repair might put you right back in debt and ruin your plans to use the avalanche method. Establishing an emergency fund guarantees that, even in the event of a life change, you can adhere to your debt reduction strategy.

Staying on Course

The avalanche method relies heavily on persistence. Although you might not see anything right away, the process speeds up as you pay off each loan. Track your progress to keep yourself motivated. You may make use of a visual tracker, such as a chart displayed on the refrigerator, or a spreadsheet. After you have paid off one loan, acknowledge the success and move the entire amount owed to the next debt on your list. As you pay off one loan after another, the amount you can put towards the next one rises, shortening the time it takes to become debt-free.

Set short-term goals and celebrate when you achieve them to keep your motivation strong. These can be as easy as following your repayment plan for a predetermined number of months or paying off a specific proportion of your debt. Never forget to focus on the goal: living a life free of debt.

Adjusting the Plan When Needed

You might need to modify your strategy at some point. For instance, you could be able to pay off debts more quickly if you have a windfall or see a rise in income. On the other hand, you could have to reduce the rate of your payments if your financial condition deteriorates. Be adaptable and occasionally review your plan to make sure it still fits your present situation. The most crucial thing is to keep going, even if it’s only a short distance at a time.

Conclusion

Using the debt avalanche strategy entails paying off the debts in a steady and planned manner. It might take perseverance and patience, particularly when you start with the loans with higher interest rates. On the other hand, the interest savings over the long run can be significant, it can free up funds for your future financial goals much sooner.

Remember that the secret to success with the avalanche method is not just in its structure, but also in your approach and consistency. Remain committed to your goals, acknowledge and appreciate your progress, and remain flexible in the face of life’s inevitable changes. You will be able to release yourself from the weight of debt and create enduring financial habits if you persevere through difficulties and stay the course.

You don’t have to pay your debt in full, sounds great right? Your debt can be reduced by up to 80%, and interest will stop immediately. You can speak with one of our debt experts at EmpireOne Credit to learn more about this debt reduction option. Call us at (416) 900-2324 to schedule a free consultation with us. Being debt-free feels good!