As a way to repay debt, one of the least successful strategies is the debt avalanche method
This strategy will appeal to individuals who probably do not have a cash flow problem or even a real debt problem, but who simply want to get away from paying interest on money they have borrowed.
What is the Debt Avalanche Method?
In its simplest definition, this strategy involves repaying debt in a manner that makes sense to everyone – by targeting the higher-rate debt first and working your way down to the debt that costs less.
Before you tackle your debt this way, be sure to read our other article: Debtors Anonymous: What kind of debtor are you?
Typically, the debtor will pay higher rate credit card balances first because these will have higher interest rates and then graduate on to lower-rate loans and lines of credit, and then finally a mortgage payment which almost always has the lowest permanent interest rate of any credit product on the market.
However, this method has its share of shortcomings because this is where most people fail.
The biggest shortcoming with this debt repayment program is that it asks the borrower to make regular but aggressive payments on the debt that carries the highest rate.
With the highest rate, much of those payments get swallowed up by the interest expenses.
This is truly unfortunate because when the debtor evaluates their progress after a year, six months, or even three months, it appears that there is very little progress. Discouragement settles in and they invariably abandon their debt repayment program.
Another shortcoming is that this type of debt does not always result in greater cash flow for the debtor. That means that after months or years of tackling this debt, the overall impact on free cash flow might be minimal.
Such a deflating experience will surely result in failure.
For these reasons, debtors who tackle their debt using the debt avalanche method for repayment should understand those risks – that progress will not appear quickly and that the cash flow benefits could be minimal once the debt is fully repaid.
Once a debtor has been successful with the debt avalanche method, however, the benefits are fairly tremendous and immediate.
The savings in interest over the long term can now be transferred to investments, normally a systematic investment program that allows for a dollar-cost-average approach to improving one’s financial health and net worth over the long term.
In order to get started with this debt-repayment strategy, you will need to complete a budget and a debt worksheet.
The budget indicates how much free cash is available at the end of every month to get applied toward the debt and the worksheet helps you to identify which debt needs to be tackled first.
If you would like a template or to work with our internal budget and worksheets, please complete the form below and we will send you PDF versions of the documents.
All we ask in return is that you revisit our site when new information is published in our Debt Advice section. Don’t worry if you are too busy repaying your debt – we will notify you once new, relevant and important information gets published!