The Avalanche method is the best way to minimize your interest payments and is our favorite tactic for paying off debt. High-interest rate debt makes it really challenging to save, invest and get ahead financially. As we outline in our Debt 101 guide, it is critical to pay off your high-interest rate debt so you can put yourself in a position to succeed financially. In the Avalanche Debt Challenge, you will implement the avalanche method, minimizing the interest you owe and getting you out of bad debt fast.
What is the Debt Avalanche Method?
The Avalanche Method will save you the most money and get you out of debt more quickly as you pay off your highest interest rate debt first.
With Avalanche, crush your debt more quickly by targeting each balance according to its interest rate.
By minimizing your total interest paid, you enable yourself to pay down your other balances more quickly, with dollars that you otherwise would have used to pay interest!
When is the best time to start?
Right now! Paying off high-interest rate debt is absolutely crucial to building a sound financial life. The reason why is compounding interest. You may be familiar with compounding interest in terms of investing and growing your wealth. But compounding interest works in reverse when you owe money at a high-interest rate. The longer it takes you to pay off the loan the more you pay in interest.
Because of the power of compounding, the quicker you can get out of high-interest rate debt the better. This is where the Avalanche method of debt paydown comes into its own.
Who is this for?
The Avalanche Debt Challenge is for those who are tired of being in debt and want to build strong money habits. If you owe money across multiple types of debt or accounts including credit cards, auto loans, payday loans, or personal loans then you can utilize the Avalanche Method.
Are you ready to be debt-free? You can sign-up for the Avalanche Debt Challenge on the Ostrich app.
How to implement the Avalanche debt challenge
Step 1: Sign-up for the Avalanche challenge. Then list out all of your debt, writing down both the balance and interest rate for each one.
Step 2: Order the list by the interest rates from the highest interest rate to the lowest.
For example, below would be the correct order of loans from highest interest rate to lowest:
- $20,000 Credit Card Debt at 20% interest
- $4,000 Personal Loan at 15% interest
- $15,000 Car Loan at 7% interest
- $10,000 Student Loan at 5% interest
Step 3: Determine the minimum payments on each of your loans. Select the loan with the highest interest rate. Determine how much over the minimum payment you are comfortable paying each month towards this account.
In the case of the example above, you would start with the credit card debt because 20% interest is higher than the other interest rates.
It’s important to note that you must still pay the minimum payments on the other loans! Then you focus on putting extra money towards your highest interest debt first.
Step 4: Automate that recurring payment from your checking account. It’ll make your life a lot easier.
Don’t forget that you must continue to make minimum payments on your other accounts.
Step 5: Check-in for Avalanche monthly on Ostrich and get debt-free with the rest of the Flock!
Tips for paying down debt more quickly
Here are some debt paydown tips to help you during the Avalanche Debt Challenge!
- Pay your balances down before the due date! Many loans accrue interest on a daily basis. That means that if your payment due date is the 30th of the month, but you pay your bill on the 15th, you’ll actually save yourself 15 days worth of interest. This simple hack can lead to hundreds or even thousands of dollars in savings over the life of your loan.
- Sell your old things for extra cash. You probably have some things you either bought and never used or only lightly used. Whether it’s that new outfit that looked great online but not so much in person, or old electronics you don’t use anymore. Hop on Facebook Marketplace, eBay or Amazon and list those suckers.
- Cut out expenses. This is one of the simplest ways to reduce the amount of money flowing out towards new purchases. Find unused subscriptions to cancel, or things you can live without. To really maximize expense reduction, try cutting back on larger expenses such as rent or transportation costs if it makes sense. You can join a no spending challenge on Ostrich if you want to join others who are also cutting back on spending.
Benefits of the Avalanche Debt Paydown Method
There are many benefits from completing the Avalanche Debt Challenge. Who doesn’t want to be debt free?
- Improve your credit. Beyond the good feeling of paying down debt, you may notice your credit score improve. When you reduce your outstanding debt and record regular payments, you’ll be taking actions that factor into your credit score. The beauty of improving your credit score is that in the future if you need to take out another loan on a large purchase you’ll likely receive a lower interest rate, saving you money.
- Focus on fun goals. After completing the Avalanche Debt Challenge you’ll be motivated to see what other financial goals you can tackle. You’ll be primed to start saving more and investing in order to get compound interest working in your favor.
- Weight off your shoulders. Getting out of debt releases dopamine to your brain, giving you that feel-good high. You’ll legitimately feel accomplished for becoming debt-free and you’ll notice you feel like a weight has been lifted off of your shoulders.
Tools to get there quicker
Automation – set up your extra payment once and then forget about it. It takes the burden off of you to remember each month. Log in to your debt service provider account or bank and set up an automatic payment. You’ll also want to automate the minimum payment on your other loans so you don’t get hit with late fees.
Consolidation – this combines debts into one payment. If you have 3 credit cards with balances you can consolidate that debt into one payment with a lower interest rate. Check out the Ostrich App to find the debt consolidation providers we recommend.
Personal Loan – another tool you could use that is similar to consolidation and that’s to get a personal loan with a lower interest rate which you use to pay off your current debts. Then you’ll have paid off your other loans and will only be paying off your personal loan.
Related debt paydown challenges to Avalanche include: Snowball, Clear Your Cards, Double or Nothing, and Minnie Me.
What to do with your newfound habit
Once you’ve paid off your high-interest rate debt you’ll have built a habit of putting extra money to pay down debt. You can now turn that newfound habit into other financial goals.
Build your emergency fund. It’s important to have at least a few months’ worth (6 months is considered healthy) of living expenses built up. This provides a cushion for your quality of life in case you lose your income. If you feel like 6 months isn’t enough try building your savings to the level of your annual salary or until you feel comfortable.
Invest for the long-term! Another great use of your new savings is to invest. Research shows that investing for the long-term (10+ years) is the way to go. We recommend getting started with low-cost index funds vs. purchasing individual stocks and using the dollar cost average investing method. Check out our favorite brokerage accounts and our favorite auto investing tools on the Ostrich App.
Take a small calculated bet. Investing for the long-term is proven to be the most sure-fire and safe way to build wealth, but it is boring. Boring is good for your major goals. We like boring! But if you have a little extra money after making your boring investments and you are okay with losing a small amount of money, explore alternative moonshot investments. This could be anything from investing in cryptocurrency, NFTs, startups, art, collectibles, or that penny stock. The key is not to make this your main strategy. Never invest more than you can afford to lose not just financially, but also psychologically.
Conclusion
Getting out from under crippling debt is a must to achieve financial success. With the Avalanche Debt Challenge, you’ll quickly get out of debt by maximizing every penny you put towards debt reduction. Once you’ve gotten used to using the Avalanche Method you can take that extra money and pay yourself first. You can sign up for Avalanche Debt Challenge on Ostrich and increase your likelihood of getting out of debt by participating with others working towards the same goal of being debt free
