Getting out of Debt: The Debt Avalanche

There are a number of methods you can use to get out of debt. Probably the most commonly known method was made popular by Dave Ramsey; the Debt Snowball.  The snowball is a useful method for digging out of debt which involves paying your smallest balance first to provide quick rewards. Having an account paid off quickly helps motivate you to keep going, and with each debt you pay off you free up more money to make payments on other debts (sort of like a snowball rolling down the hill – as it picks up momentum it gets larger).

The only downside of the debt snowball is that you typically pay more interest and over a longer period of time than you would if you used an interest-rate based method of repaying your debts– like the Debt Avalanche.

The Debt Avalanche is attributed to Flexo of ConsumerismCommentary.com, and is similar to the snowball except it focuses on paying less interest and shortening your overall repayment period.  Here's a summary of his process for getting out of debt as quickly as possible, while paying the least amount of interest possible:

   1. Make a list of your debts in order of highest interest rate  (after tax) to lowest.  Typically, this means your credit cards will be at the top of the list.  It doesn't matter how much you owe on each account when making your list.  It's important that all debts that you pay monthly are part of your list, so don't leave anything out.

   2. Pay the minimum payment on every account each month, except for your highest interest account.

   3. Pay as much as you can to the account in the first spot on your list with the highest interest rate until it's paid off.  If you have an emergency fund you should use that money to pay down the debt with your highest interest as well.  The interest you earn on your emergency savings is not likely to be as much as the interest you're paying on your highest interest debt.
 
   4. As shampoo bottle instructions have made famous, rinse and repeat!  Every month you pay the minimum on all accounts except for the one with the highest interest rate. When the first account on your list is paid off, you'll apply all your extra money each month to the second account on the list, and continue moving down your list of debts until everything is paid off.

By paying the most to the highest interest account, you're paying less toward interest and more towards principle at all times.  As long as you making minimum payments before the due date on all other accounts, you will not get into a worse situation with late fees.  

This guest post from Trisha Wagner. Trisha Wagner is a freelance writer for DepositAccounts.com where you can compare the rates of deposit accounts from dozens of banks in one place.  Trisha writes regularly on the topics of personal finance and saving accounts.

It's important to keep an eye on your accounts and re-order if any of your interest rates change before you pay off all your debts.  If you need motivation to keep going, reward yourself each time you pay $500 or $1,000 off your total debt.

Above all, don't take on new debts while you're focused on repaying your existing debt!  The only way to get out of debt is to stay the course and avoid taking on more debt.