By Sabrina Karl
For anyone with multiple debts, the prospect of paying them all off can feel overwhelming. But with a few minutes and a pencil and paper, you can use the debt avalanche method to craft a plan that will have you paying the least amount of interest and getting debt-free as soon as possible.
Start by collecting the details of all your outstanding debts so you can list them with their interest rate and minimum monthly payment. Most people will focus on credit cards, auto loans, personal loans, and student loans, but if paying off your mortgage early is a goal, you can include it as well.
Next, order the debts by interest rate, with the highest-rate debt at the top. The idea is to always be focusing your extra payments on whatever debt is costing you the most.
All the while you’ll make the minimum monthly payments on your lower-rate debts, to keep everything current and build your credit. You’ll also need to decide how much extra money you can commit each month to your debt reduction goals.
Whether that commitment is $100 or $1,000, the avalanche method will have you applying the entire extra amount to the debt at the top of your list. And if you have extra one month, you can pay that towards your top debt as well. You’ll do this every month until that debt is paid off, then move to the debt with the next-highest rate.
The avalanche method has basic math in its favor. By always targeting your most expensive debt, you reduce how long you’re on the hook for that high interest rate, and reduce the overall interest you’ll pay in the end. For those with significant debts, it will also shorten the time needed to reach your debt reduction finish line.