DEBT AVALANCHE METHOD
Once you’ve set your budget and know how much you have left after income, fixed and variable expenses, you know by now how much you have left to SMASH YOUR GOALS!
(If you have no idea what I’m talking about, check my how to start a budget posts)
If your goal is debt freedom, there are a couple of different methods you can use to overpay your debts, one of these being the debt avalanche method.
The debt avalanche method is where you list all your debts in order of interest rate, starting with HIGHEST interest rate first, regardless of your total debt balance for each debt.
If you don’t know your interest rate, this should be available on your loan, overdraft or credit card statements.
You will still make all your minimum payments for each debt (do this within the fixed expenses section of your budget because they have to be paid or you will impact your credit rating) but then with any money you have leftover in your budget after your bills, sinking funds and general spending money, focus your overpayments towards the debt with the HIGHEST interest rate first!
At this point it is also important to be mindful of how much you are budgeting for within your fun money and non necessary sinking fund categories to make sure it is reasonable and in line with your goals.
It’s easy to think we “have” to spend excessive amounts on gifting at Christmas for example, but if this hinders your goals of becoming debt free then is it really worth it to you?
If there are any areas you can reduce so that you are able to allocate more to debt overpayments, this will mean you are able to pay your debt off as quickly as possible and also pay less interest on the debt. Likewise, if there is any additional money from side hustles or unexpected income, throwing these at your debt is a great way to make even more progress!
By paying debt in this way it can save you from paying high interest fees, as your overpayments go straight off the debt and therefore less debt will accrue the highest rate interest. In the long term, this will SAVE YOU MONEY in your overall debt payments, meaning less money going out of your pocket between now and being debt free!
However, some people find the avalanche method isn’t always as motivational because the highest rate debt might be the largest debt and take you longer to pay off, so you could still end up with multiple debts to pay (instead of clearing lower balances down more quickly). I will share more on other methods in future posts.
By tracking your debts in order of interest rate you are also able to see where you might be able to make changes such as balance transfers to cheaper debt.
This is where you transfer your debt to another provider who offers a lower interest rate, meaning you make a saving on your overall interest.
You may incur a fee to transfer (usually 2-3%) so you need to make sure that if you do this your new interest rate plus the charge is lower than your current rate.
You may incur a fee to transfer (usually 2-3%) so you need to make sure that if you do this your new interest rate plus the charge is lower than your current rate.
You might feel overwhelmed with the debt you have, but setting a plan and knowing it is saving you money is a great way to start feeling in control of your money again.
Do you follow this method? Is it something that works for you?