Avalanche

Debt Avalanche (often simply called the Avalanche method) is a powerful strategy for paying off debt. Think of it as the financially savvy way to clear your personal balance sheet. Instead of starting with the smallest, most manageable problem, you target the biggest, most dangerous boulder first. Specifically, you focus all your extra repayment firepower on the debt with the highest interest rate, while making only the minimum payments on everything else. Once that high-interest monster is slain, you roll its entire payment (your original minimum plus all the extra cash you were throwing at it) onto the debt with the next-highest interest rate. This process continues, creating a payment “avalanche” that gathers momentum and systematically wipes out your debts in the most cost-effective way possible. It requires more patience than other methods, but it guarantees you'll pay the least amount of interest over the long run.

Following the Avalanche method is a straightforward, logical process. It turns the chaos of multiple debts into an orderly battle plan.

1. 1. List Your Debts: Write down every single debt you have—credit cards, student loans, car loans, personal loans. Don't leave anything out.
2. 2. Find the Interest Rates: Next to each debt, write down its current Annual Percentage Rate (APR). This is the crucial number.
3. 3. Rank by Rate: Order your list from the debt with the highest interest rate to the one with the lowest. This is your hit list.
4. 4. Attack the Top: Focus all your extra available cash on the debt at the top of your list. Continue to make the required minimum payments on all your other debts to keep them in good standing.
5. 5. Create the Avalanche: Once the top debt is fully paid off, congratulations! Now, take the entire amount you were paying on it (the minimum payment + all the extra cash) and add it to the minimum payment of the next debt on your list. This combined, larger payment is now your new weapon.
6. 6. Repeat and Conquer: Continue this process, rolling over payment amounts as each debt is eliminated. Your payment “avalanche” will grow larger and more powerful, clearing debts at an accelerating pace until you're finally debt-free.

Why does this work so well? It's all about fighting the destructive power of compound interest. High-interest debt is like a financial weed that grows incredibly fast; the longer you leave it, the more it costs you. By attacking the 22% interest rate credit card before the 6% car loan, you are starving the most expensive debt first. Every extra dollar you pay towards a high-interest loan saves you far more in future interest payments than that same dollar would on a low-interest loan. It's the most mathematically efficient path, ensuring that the least amount of your hard-earned money goes to lenders and the most goes toward building your own wealth.

For any aspiring investor, managing personal debt is the first step toward building capital. The choice between the Avalanche and the Debt Snowball method (paying off the smallest balance first) reveals a lot about your financial mindset.

The Avalanche method is the clear winner from a purely financial standpoint. It minimizes the total interest paid, which means you get out of debt faster and for less money. This aligns perfectly with the core philosophy of value investing: making rational, data-driven decisions that maximize long-term financial outcomes. A value investor seeks to eliminate unnecessary costs, and high-interest payments are one of the biggest wealth-draining costs an individual can have. The discipline required to stick with the Avalanche method, even when a “quick win” isn't in sight, is the same discipline needed to hold a great company's stock through market volatility.

The Debt Snowball method provides quick psychological boosts. Paying off a small debt, regardless of its interest rate, feels like a victory and can build motivation. However, this feeling comes at a literal cost—you will pay more in interest over time. It prioritizes emotion over math.

While the best debt-repayment plan is the one you'll actually stick to, a true value investor should aspire to the Avalanche method. It demands patience and a focus on the numbers over short-term emotions, which are the hallmarks of successful investing. Choosing the Avalanche is your first act as a value investor: you are optimizing your personal balance sheet and making the decision that creates the most value for you in the long run.

The Avalanche method is the ideal choice for you if:

• You are motivated by numbers and efficiency. Seeing the total interest you're saving keeps you going.
• You are disciplined and can stick to a plan without needing constant small victories to stay on track.
• Your primary goal is to minimize the total cost of your debt and become debt-free in the most financially optimal way.