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Money Tactics: The “Avalanche” Approach

Money Tactics: The “Avalanche” Approach

An avalanche cascades down a mountain -

Previously, we published a blog post detailing the “snowball approach” to paying down debt. While it can be ruthlessly effective at putting a chill on your debt balances, it may not be the right approach or strategy for everybody — if it doesn’t quite work for you, there are other tactics you can try as well.

One of them is the “avalanche approach,” which, as you may have guessed, is similar to the snowball method. They are both strategies for paying off or down debt, and neither of them actually has anything to do with snow.

But, like the snowball approach, the avalanche method may and can be an effective tool to help you get out of debt.

The Avalanche Tactic in Action

Like the snowball tactic, the avalanche method is pretty simple. And, like the snowball approach, the avalanche method utilizes some sort of underlying psychological mechanism that helps us feel like we’re gaining momentum as we pay down our debt — and that can be surprisingly beneficial, even if there isn’t any literal wind at your back.

As for what the avalanche tactic actually is and how it works? The avalanche method involves focusing your payoff efforts on your debt balance with the highest applicable interest rate, and paying that balance off before any of the others. Conversely, the snowball method involves paying off the smallest balance first. The advantage of the avalanche method is that it helps you save the most money in the long run by knocking out debt with higher interest charges.

That’s the trade-off when trying to decide between the snowball or avalanche method: Do you want to feel more momentum as you knock out your debts one by one, or do you want to save as much money in interest charges as possible? It’s up to you — and again, there’s no right answer.

How to Use the Avalanche Tactic

The first thing you need to do, when utilizing either, is to get all of your debt balances in order so that you know what’s facing you. That means literally making a list with your debt balances and applicable interest rates. 

As an example, let’s consider Chad’s debts, which look like this:

  • Credit card 1: $50 at 5% interest
  • Credit card 2: $250 at 3% interest
  • Auto loan: $5,000 at 9% interest
  • Student loan 1: $3,000 at 6.1% interest
  • Student loan 2: $12,000 at 6.1% interest

So, using the avalanche method, Chad would pay off his debts in this order, regardless of overall debt balances (while also making at least the minimum payments on the rest):

  • Auto loan: $5,000 at 9% interest
  • Student loan 1: $3,000 at 6.1% interest
  • Student loan 2: $12,000 at 6.1% interest
  • Credit card 1: $50 at 5% interest
  • Credit card 2: $250 at 3% interest

Again, Chad is prioritizing his debts with the highest interest rate first. It may be easier to pay off a $50 credit card bill, of course, which isn’t a bad thing to do — but whether he does that will depend on which tactic or approach works best for him.

At the end of the day though, the best method is whatever works for you, as long as you stick to your plan and work toward your goal of being debt free!

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