Debt Avalanche Method
The Debt Avalanche Method is a debt reduction strategy where debts are paid off in order from highest interest rate to lowest, minimizing total interest paid and providing the mathematically optimal path to debt freedom.
Exam Tip
Avalanche = highest INTEREST RATE first. Mathematically optimal - saves most money. Takes longer to see first payoff. Best for disciplined, analytical clients.
What is the Debt Avalanche?
Prioritizes mathematical efficiency over psychology.
How It Works
- List debts from highest to lowest INTEREST RATE
- Make minimum payments on all except highest-rate
- Put extra money toward highest-rate debt
- When paid off, roll payment to next highest rate
- Repeat until debt-free
Example Order
| Debt | Balance | Rate |
|---|---|---|
| Credit Card | $2,500 | 22% |
| Car | $8,000 | 6% |
| Student Loan | $15,000 | 5% |
| Medical | $500 | 0% |
Savings Example
With $400/month extra:
- Snowball: $9,200 total interest
- Avalanche: $6,800 total interest
- Savings: $2,400
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Related Terms
Debt Snowball Method
The Debt Snowball Method is a debt reduction strategy where debts are paid off in order from smallest balance to largest, regardless of interest rate, providing psychological wins that build momentum.
Emergency Fund
An Emergency Fund is a readily accessible savings reserve equal to 3-6 months of essential living expenses, designed to cover unexpected costs or income loss without requiring debt or liquidating investments.