Debt Avalanche Method
The debt avalanche method is a debt repayment strategy that involves prioritizing and paying off debts based on their interest rates.
In this method, you focus on tackling the debt with the highest interest rate first, making larger payments towards it while paying the minimum on other debts. Once the highest-interest debt is paid off, you redirect the funds to the next highest-interest debt, creating a cascading effect.
This strategy is aimed at minimizing the overall interest paid and potentially allowing for more efficient debt elimination.
Example:
Let's say you have three debts:
Credit Card A: $500 (minimum payment of $50)
Personal Loan B: $1,000 (minimum payment of $100)
Student Loan C: $2,500 (minimum payment of $150)
If Credit Card A has an interest rate of 18%, Personal Loan B has an interest rate of 12%, and Student Loan C has an interest rate of 6%, you would prioritize paying off Credit Card A first due to its higher interest rate.
Areas it can help in: Budgeting, Expense Control, Spending Discipline, Tracking and Awareness, Debt Repayment, Financial Responsibility, Psychological Motivation, Quick Wins, Savings
Additional Exploration:
The Debt Avalanche Method: How It Works And How To Use It – Forbes Advisor
