Don't Let Your Debt Snowball

Document created by danielleo on May 20, 2016Last modified by amara.mastronardi@socialedgeconsulting.com on Dec 5, 2016
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Paying off your student loans is tough, especially when you have mounting credit card debt from your bad spending habits in college. Work your way to becoming debt-free by following this simple trick: The Avalanche Method.

 

Step 1. Order your debts from highest interest rate to lowest. You may find credit cards at the top of the list. It’s typical to see interest rates from 10% to 20% or more. It’s important for your list to capture every debt for which you make a monthly payment. Student loans may be the last on the list, particularly if you qualify for tax credits. The Avalanche formula won’t work properly if it covers only a portion of your debt, so consider all accounts.

Order your list from the highest interest rate (after tax) to the lowest.


Step 2. Pay the minimum to all debts every month. If you’re writing down your list, or using a spreadsheet like Excel, add a column next to each debt to list its minimum monthly payment. This is the amount you will pay towards each debt, except for the one account listed at the top of the list.


Step 3. To your debt with the highest interest, send all extra available cash. If you have an emergency fund or money available from your savings this step is simple. Since it’s unlikely that you can earn more in savings than you can “earn” by paying off your debt, all your unused income after paying expenses (necessary and discretionary as you see fit) should be dedicated towards the debt account with the highest interest rate.


Step 4. Repeat every month. You cover all your bases by ensuring every debt receives the minimum payment, but you hone in on your debt with the highest interest. Once that debt has been paid off, take all of the money that you would have been putting towards that debt each month, and apply it the next debt on the list. Continue this until you have paid all of your debts. You won't even notice the difference in your bank account, because you've already included these payments in your budget! It's that simple. No other method will get you out of debt faster and save you as much money.

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