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- List and rank all your debts, and prioritise
repayments - Use additional resources to pay off debts with the highest interest rate first
- Once one
debt is paid off, use that money to pay off the debt with the next highest interest
Debts are essential at times, but when they pile up, it can be a problem. In these uncertain times, many people have been relying on high-interest, instant loans, often not realising the total cost associated with such debts. At times, one may find themselves straddled with high debt, thus putting stress on the personal and family finances. In such cases, it is important to have a debt repayment strategy in place.
One of the best debt payment strategies is known as the
The avalanche system of debt payment means paying off the debt with the highest interest first. Here is how it works.
- List your debts: Gather all your debts, including
credit cards , personal loans, home loans and so on. Note down the outstanding balance, the monthly payment required, and most importantly, the interest rate for each debt. - Rank interest rate: Organise your debts from highest interest rate to lowest. The debt with the most punishing interest becomes your prime target.
- Allocate resources to pay all debts: Develop a monthly budget and allocate as much money as possible to cover the payments on all your debts. If it is credit card debt, be sure to make the payment in full, because making a minimum payment will only make things worse as the interest on the remaining amount keeps mounting.
- Avalanche the extra: Here’s the key part. Any extra money you can muster for debt repayment gets thrown at the debt with the highest interest rate. This extra payment goes towards the principal amount in addition to the minimum payment, accelerating its payoff.
- Repeat: Once the highest interest debt is eliminated, repeat the process directing all the extra money (including the freed-up minimum payment from the paid-off debt) towards the next highest interest rate debt. This helps you pay off debts faster and save money on overall interest charges.
When debt piles up, one may feel helpless. But careful planning can help pay off debt little little and be debt-free at the earliest.