The Debt Avalanche

The debt avalanche is the more traditional and mathematically correct method of debt reduction. It is called an avalanche because it starts small but becomes very large and powerful as time progresses. In this method the interest rate is everything. In researching this method, I hit on a few useful twists that can also be applied to Dave Ramsey’s, debt snowball.

The method works as follows. First let’s look at the numbers we made up last week and add interest rates. Remember, in the debt snowball interest rates don’t matter.

Debt Interest Rate
$500 Owed to store for new TV 0% for two years
$1,000 Credit Card A 15%
$5,000 Credit Card B 23%
$6,000 Credit Card C 12%
$12,000 Car Loan 8% for three years
$19,000 Home Equity Line of Credit (HELOC) 12%
$ 150,000 Mortgage 6% for thirty years

First ask Credit Card B to lower their rate. This can’t hurt. Right now it might help. Obviously this works for the debt snowball as well.

Rack ‘em and stack ‘em according to interest rates. This time differentiate between good debt and bad debt. Some might disagree with my selections of good and bad but so be it.

Bad Debt

$5,000 Credit Card B 23%
$1,000 Credit Card A 15%
$6,000 Credit Card C 12%
$19,000 Home Equity Line of Credit (HELOC) 12%
$500 Owed to store for new TV 0% for two years

Good Debt
$12,000 Car Loan 8% for three years
$ 150,000 Mortgage 6% for thirty years

Continue to pay the minimum on all your debts and use any extra money you have to go after Credit Card B, then progress to the next item on the list adding the money freed by paying off the previous item until all debts are paid in full. As with the debt snowball there are calculators and spread sheets that will help you watch your progress and manage your debt reduction process.

Bother James is not my favorite but that is where, "ye have not, because ye ask not," can be found.

James 4

[2] Ye lust, and have not: ye kill, and desire to have, and cannot obtain: ye fight and war, yet ye have not, because ye ask not.
[3] Ye ask, and receive not, because ye ask amiss, that ye may consume it upon your lusts.