By Roger G. Best
This is my second installment dealing with the different methods of reducing y our debt. My last articles “Debt Reduction Methods – Part 1” addressed the snowball method. If you haven’t already read that one, you’ll want to do so, although it’s not necessary to read it before you read this one. In this article we’ll address the avalanche method of debt reduction.
There’s no doubt that if you follow this option to its final conclusion you will have arrived at your desired “debt-free” live much sooner and pay far less interest that via other methods. Some argue that even though you will save more in interest and arrive at a “debt-free” life quicker, you are less likely to follow through with this method to its completion just because it plays into the psyche less than the snowball approach. My biggest argument with that idea is that I can find no actual data to support that conclusion.
The Debt Avalanche method has four simple steps, and if you follow them, you’ll arrive at your goal of being debt free much faster while paying a lot less in money (due to knocking out the higher interest rate loans first) than via other methods. Here are the steps:
Step 1: Order your debts from highest interest rates to lowest. Typically, you’ll find credit cards at the top of this list. In days gone by, it wasn’t unusual to see credit cards with interest rates of 10% to 20% but today you may even find rates as high as 30% plus. Store credit cards are often on the top of the credit card lists as well. Don’t be deceived by those introductory rates either. With decent credit, many companies will offer a low interest rate initially on your balance and even encourage you to transfer existing balances to their cards. You may find that in a few short months that your rates have soared above what you may have been paying.
Step 2: Pay the minimum to all debts every month. When you make your list, create a column to list the minimum payment for each debt on your list. Hang on for just another few seconds. Stick with me through the next step before you call me a lunatic. This minimum payment is what you will pay on each debt EXCEPT the one that is on the top of your list… That being the one with the highest interest rate.
You should also create a column to list the payment due dates. All of your payments should ALWAYS arrive at your creditor before the due date. You’ll save yourself a lot of money in penalties and in some cases you can even save interest by paying a couple of weeks early.
Step 3: To the debt with the highest interest rate, send all extra available cash. Most of us pay something extra to our credit cards each month, or to our mortgage payment or car loan. This approach prescribes taking all of that extra money and paying it exclusively to the debt that is highest on your list (has the highest interest rate). In fact, if you have a budget (if you don’t have one, it’s time to create it), look for any place that you can scrape up any extra money and apply it to the first item on your list. The more you pay here, the faster you’ll pay down your most costly debt.
Step 4: Repeat this process every month. Don’t miss a month, don’t miss a creditor! Just keep a running list (and check it every month to assure that it’s still accurate) of your debt, ordered by interest rate (highest to lowest) and pay all extra monies to that account. Once you’ve paid off the items listed at the top, simply remove it and move down to the next item.
This article is already getting long so I’ll move on for now. Please come back in the next day or so because I’ll give you additional info about this, and other options.