The “Avalanche” Method
This week we are continuing our series of posts on debt reduction by discussing the second strategy, the “Avalanche” method, where you tackle your biggest debts first and work towards your smallest debts. This post will outline how to apply the “Avalanche” method to your debt. The “Avalanche” refers to how you first pay your biggest debts and then move to the smaller ones, just as an avalanche starts out with a lot of snow and slowly loses it as it goes down the mountain.
This method is good for people who are anxious to reduce the amount of interest they will be paying on their debts. You can either start with the largest overall debts or with the debts that charge the highest interest rates. If you organize your debts so that you tackle the largest debts first you will quickly reduce your overall debt, however if you start with the debt with the highest interest rate you will reduce the amount of interest you have to pay overall.
Create a Spreadsheet
If you haven’t already created a spreadsheet to organize your debts you should do so now. Starting with the debt you plan to pay off first list your debts in descending order either by interest rate or by total amount owed. As you pay off each debt you can redirect those debt paying funds to your other debts, paying them off at a faster rate. Be sure to account for the additional interest you will incur each month from each debt.
Pay off your debts
Let’s say you have a Visa balance of $3000 with an interest rate of 15%, a Mastercard balance of $1000 with an interest rate of 20% and an overdue phone bill of $400 with an interest rate of 3%. If you choose to organize your debt repayment plan according to interest rates you will pay off your Mastercard, then your Visa, then your phone bill. This strategy will reduce the amount of interest you pay since you will be eliminating your debt with the highest interest rate first. If you organize your debt repayments by total amount owed you will pay off your Visa, then your Mastercard and finally your phone bill. This will reduce your overall debt load because you will eliminate the $3000 Visa debt first. Always be sure that you are paying at least the minimum payment, but you should really try to pay off as much debt as you can each month. You should also put more money towards each debt as debts are paid off. If you have $500 each month to put towards paying down your debt you can start by paying the minimums on all of your bills and allocating the rest to your largest debt. Once your largest debt is paid you can redistribute the $500 amongst your remaining debts, paying the minimums on each and then putting the rest towards the debt you are currently tackling.
Next week we will be discussing some strategies for remaining debt free that you can use once you have paid off all your debts.
If you are feeling overwhelmed by your debt call Tim Lacroix today at 403.648.1541 to book your free, one hour Financial Planning consultation.