Debt avalanche method – how does it work?

Posted on 19 May 2023

Written by Chris Galea

It is all too easy to feel as though you are standing on top of a mountain of debt when you have various bills and expenses to pay off. Thankfully, there are methods to chip away at this mountain to help you regain control over your debts. The debt avalanche method is a type of debt repayment plan in Canada. In this article, we explain exactly what it is, but also how you can put the debt avalanche method into practise to achieve repayment of your debts. While there are a number of debt repayment plans available, the debt avalanche method is particularly good if you are looking to pay off your most expensive debts first. While it can feel like a slow process initially, you soon end up avalanching your way to the bottom of your debt before you know it. Here is everything you need to know about the debt avalanche method.

What is the debt avalanche method?

The debt avalanche method is a type of debt repayment plan. You essentially ensure you cover the minimum payment on each of your respective debts, then put any additional funds you have towards your debt with the highest interest rate. It means that you pay off your most expensive debts first. Once the debt with the highest interest rate is paid off in full, you will then put any additional funds towards the next highest interest rate. This process continues until all of your debts are repaid. In the long run, it can save you hundreds (sometimes thousands) in interest payments and often you can save in the longer term. The debt avalanche method is often compared to the debt snowball method, which is where you pay off your smallest debt first. Which debt repayment method you use depends on your personal preferences and motivations. While the debt snowball method can mean you see quicker wins, the debt avalanche method often saves you money despite initially slow progress.

How does the debt avalanche method work?

If you are eager to try the debt avalanche method, you should first of all assess your expenses and income. You should see how much of your income you can reasonably afford to go towards your debt repayments, outside of day to day expenses including rent and groceries. From this amount, you will then want to subtract the minimum payment required for each debt each month. You should then establish the interest rate of each of the debts you have, and assigning any remaining funds towards your highest interest rate debt. You will continue to do so until this debt is repaid, and then you will move onto the next most expensive interest rate debt.

What are the advantages of the debt avalanche method?

The primary advantage of the debt avalanche method is that it is the most cost efficient debt repayment method. It reduces the amount of interest you will pay on your debts in the long term. Provided you commit to making your monthly payments, you will also be able to reduce the time taken to pay off your debts because you will be accumulating less compound interest payments. Some financial products like credit cards can come with hefty compound interest rates, and so paying these off sooner rather than later can save a considerable amount of money in the long run. One point to note is that the debt avalanche method does require commitment to succeed. You need to be disciplined in making your payments each month – including the minimum payments on all debts – in order for it to work.

Debt avalanche method vs debt snowball method

Both the debt avalanche method and the debt snowball method are often compared. By comparison, the debt snowball method is when a debtor pays both the minimum payments across all debts, and then uses any additional funds to pay off the smallest debt first. The idea is that it can give you momentum by seeing debts paid off in full, meaning you repay small debts quickly. While the debt avalanche method does not see you make progress quickly as it is focused on paying off the highest interest debts first, it is more cost efficient in the grander scheme of things. On the other hand, the debt snowball method is less likely to save you money, but it can be motivating to see debts get paid off. Choosing between the two debt repayment methods therefore depends on your motivation.

Is the debt avalanche method a good choice?

When determining whether or not the debt avalanche method is right for you, it may not be the right choice for those looking for instant gratification. Larger debts with higher interests will probably take longer to pay off, and it could be a while until you begin to see progress. It also takes a lot of commitment and discipline to keep up with the routine payments, but can provide some great savings longer term. Whichever debt repayment strategy you choose, you should create a reasonable budget that you can stick to each month.

Do you have further questions on the debt avalanche method? Book a free consultation with a Licensed Insolvency Trustee at Spergel who can support with any questions on your debts or financial situation. We treat every individual with compassion and understanding, and can review your financial circumstances to advise you on the best pathway to debt relief. Reach out today – you owe it to yourself.

Chris Galea

Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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