According to billionaire investor Mark Cuban, paying off debts is one of the best investments you can make. The Debt Avalanche Method is a popular method to plan out debt repayment. This method is a mathematically efficient approach to paying off your debt. You begin by paying the debt with the highest interest first. By doing so, you ensure paying the smallest amount of interest over time. Keep reading to see if the Debt Avalanche Method is the right fit for you.
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What Are the Steps of the Debt Avalanche Method?
Here is the process for becoming debt-free with the Debt Avalanche Method.
1. Organize Your Debts
First, write down your debts on paper or in a spreadsheet. List them in order from the highest annual percentage rate to the smallest. For example:
$5,600 Credit Card Balance with 17.99% APR
$370 Credit Card Balance with 15.99 % APR
$17,000 Car Loan with 7% APR
2. Pay Off Your Highest Interest Debt
Make only the minimum payments on each debt, except the one with the highest APR. However, avoid using all of your savings to pay debts. Instead, set aside a specific amount from your income each month to pay toward the loan with the highest interest.
By paying off the highest interest loan first, you accrue the absolute minimum amount of interest — saving you the most money in the long run.
3. Move On to the Next Debt
Once the highest interest loan is paid, move to the next debt on your list. Every debt you pay means one less minimum payment, allowing you to put more toward the rest of your debts and eventually cross them off one by one.
4. Pay the Minimum on Other Debts
Continue to pay at least the minimum on any other debts still remaining, so as to remain in good standing.
5. Repeat Until You Are Debt Free
Make your way down the list, paying off every debt from highest interest to lowest until you reach the end and become debt free.
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The Debt Avalanche Method Compared to Other Debt Repayment Methods
The Debt Avalanche Method is arguably the most efficient way to repay debts, but it might not be the best for everyone. For instance, if your highest interest loan is also your largest, it may be difficult to feel like you’re making any progress.
Other debt-repayment options include the Debt Snowball Method and debt consolidation. With the Debt Snowball Method, you pay off your smallest debt first. While it might not be as financially efficient, it likely has a psychological advantage as people are often motivated to continue paying off debt when they’re seeing immediate results.
Debt consolidation means getting a loan at a lower interest rate for your total debt amount, so you can pay off high-interest loans immediately. You then focus on repaying your consolidation loan provider. However, not everyone may qualify for a debt consolidation loan, but anyone can use the Debt Avalanche Method.
What’s Next After Paying Off Your Debt?
Now that you know about the Debt Avalanche Method and how it’s different from other debt repayment methods, analyze your financial situation and plan out your next steps. If you think the Debt Avalanche Method is a good fit for you, then apply it today by starting with step one, and begin your journey to becoming debt free.
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Melanie Grafil contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: The Debt Avalanche Method: How Does It Work?