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Paying off consumer debt is very important for your financial health. My husband and I spent the first 5 years of our marriage digging ourselves into a hole of more than $80,000 in consumer debt. In 2015 we started our journey of getting out of debt. With a household income that hovers right around $50,000, it has been a long journey. When we first started our journey we needed a plan to get out of debt. There are two major mathematical equations to get out of debt – the debt snowball vs the debt avalanche. Today, we are going to discuss the debt avalanche and how it might be the right choice for your family.
If you are new to budgeting you may want to check out this post first:
Creating a Budget for a Happy and Secure Home
WHY SHOULD I PAY OFF DEBT?
You definitely want a big reason for paying off your debt. If you don’t have a big enough reason why you will struggle to follow through with your plan. Other than your personal reason why for paying off debt because debt is risky. Your paycheck is not truly yours and you’ll continue to need to make payments regardless of job loss and illness etc. It is a burden. Until you have paid off your debt you’ll be shackled to the lender.
Paying off your debt will give you freedom. This freedom will allow you to spend your money based on your values. You will be able to invest more into your future and if something is to go wrong like job loss or illness you won’t be burdened with collections if you are unable to pay your bills.
While we are not completely debt free at this point we have felt such a sigh of relief as we pay off each credit card or loan. That is one less lender we have to deal with and one less bill that needs to be paid every month. We have a bit more wiggle room in our budget now to pay off our other debts, save for emergencies, and enjoy a bit of our hard earned money.
What is the Debt Avalanche?
The debt avalanche is a debt repayment method where you list your debts in order from smallest to largest by the interest rate.
Credit Card 1: $2,563 @ 27% minimum payment $100
Medical Bill: $890 @ 18.3% minimum payment $50
Credit Card 2: $250 @ 16.7% minimum payment $25
Credit Card 3: $567 @ 12.2% minimum payment $25
Car Loan: $15,745 @ 5.5% minimum payment $350
Pay your minimum payments on all of your debts except the largest interest rate. This is the debt you will want to put every extra penny into to pay off quickly. By concentrating on just one debt at a time you will be able to pay it off quicker.
When your first debt is paid off you’ll take your minimum payment and add it to the next debt on the list. Now, in the example above your payment on the medical bill will be $150 plus any extra money you are able to put toward it. You will continue to roll your payments into the next debt until your debt avalanche is complete.
WHY WOULD I USE THE DEBT AVALANCHE?
The debt avalanche is based solely on the math. By paying off the debts based on the interest rate you will save more money in the long run. It may take you a bit longer to pay off that first debt especially if it’s larger but you’ll make up for it with the money you are saving over time.
THE DEBT AVALANCHE IS A MATHEMATICAL TOOL WHEN YOU ARE PAYING OFF A LARGE SUM OF CONSUMER DEBT.
Now, you have a basic understanding of the debt avalanche. This debt repayment method will give you the biggest bang for your buck. You’ll save money in interest along the way and will most likely pay off your debt a bit sooner.