Debt Avalanche

The Debt Avalanche is a highly effective and financially disciplined strategy for eliminating debt. The core principle is simple: attack your debts in order of interest rate, from highest to lowest. While making minimum payments on all your outstanding loans, you channel every extra dollar you can find towards the debt with the highest Annual Percentage Rate (APR). Once that debt is wiped out, you redirect the entire payment amount (the original minimum plus all the extra cash) to the debt with the next-highest interest rate. This process creates a powerful, growing “avalanche” of money that systematically crushes your debts. This method is the most efficient way to pay off debt because it minimizes the total amount of interest you pay over time, freeing up your capital faster so you can get back to building wealth.

Think of high-interest debt as a major leak in your financial boat. It's not just a loan; it's an anti-investment that actively drains your wealth through the power of Compound Interest working against you. The Debt Avalanche method is the most logical way to patch that boat. By targeting the highest-interest debt first, you are stopping the most damaging leak and minimizing your total cost. For a value investor, this approach is second nature. Value investing is about finding great assets at a fair price and avoiding unnecessary costs that erode returns. Paying off a credit card with a 22% APR is equivalent to earning a 22% risk-free, guaranteed return on your money. No stock or bond can promise that. The Debt Avalanche prioritizes eliminating these high-cost Liabilities first, which is a fundamental move in sound Capital Allocation. It's about being ruthlessly efficient with your money to build a stronger financial foundation for future investing.

Launching a Debt Avalanche is a straightforward process that requires discipline more than anything else. Follow these steps to get started.

1. Step 1: List All Your Debts. Write down every single debt you have—credit cards, car loans, student loans, personal loans. For each one, note the current balance, the minimum monthly payment, and, most importantly, the Annual Percentage Rate (APR).
2. Step 2: Rank by Interest Rate. Arrange your list of debts from the highest APR to the lowest APR. This is your battle plan. The debt at the top of the list is your first target.
3. Step 3: Focus Your Firepower. Continue to make the required minimum payments on all your debts to keep them in good standing. However, any extra money you can budget for debt repayment should be aimed exclusively at the debt with the highest interest rate. Whether it's an extra €50 or $500, it all goes to that number one target.
4. Step 4: Roll the Payment Over. Once your highest-interest debt is completely paid off—congratulations!—you don't stop. Take the entire amount you were paying on that cleared debt (its minimum payment + all the extra cash) and add it to the minimum payment of the next debt on your list.
5. Step 5: Repeat and Conquer. Continue this process, rolling your ever-growing payment down the list from one debt to the next. Your payment amount will feel like a small snowball at first, but as you pay off each loan, it will grow into a powerful avalanche that clears your remaining debts with surprising speed.

The main alternative to the Debt Avalanche is the Debt Snowball method. Understanding the difference is key to choosing the path that aligns with your financial philosophy.

The core difference between the two strategies lies in their focus:

• Debt Avalanche: Focuses on math. By paying off high-interest debt first, you are guaranteed to pay less total interest and become debt-free faster (or at the same time, but having paid less). This is the financially optimal choice.
• Debt Snowball: Focuses on psychology. With this method, you pay off your debts from the smallest balance to the largest, regardless of the interest rate. The goal is to score quick, motivational wins by clearing small debts fast, which can help people stay on track.

From a value investor's perspective, the choice is clear. While the psychological boost of the snowball is real, the avalanche is the only method that optimizes your financial outcome. An investor's job is to make rational, data-driven decisions, not emotional ones. Paying off a $1,000 loan at 4% interest before a $10,000 loan at 20% interest is, financially speaking, a mistake. It's like choosing to sell your best-performing stock to hold on to your worst.

Let's say you have an extra $300 a month to put toward your debts and you're dealing with the following:

• Credit Card: $3,000 balance at 21% APR (Minimum Payment: $75)
• Car Loan: $12,000 balance at 7% APR (Minimum Payment: $250)
• Student Loan: $5,000 balance at 4.5% APR (Minimum Payment: $50)

1. Target 1: The Credit Card (21% APR).
   • You pay the minimums on the car ($250) and student loan ($50).
   • You throw everything else at the credit card: its $75 minimum + your extra $300 = $375 per month.
   • Once the credit card is paid off, you've freed up $375 each month.
2. Target 2: The Car Loan (7% APR).
   • You continue the minimum on the student loan ($50).
   • You now attack the car loan by “rolling over” the previous payment: its $250 minimum + the $375 you were paying on the credit card = $625 per month.
   • Once the car loan is gone, you have a massive $625 payment to work with.
3. Target 3: The Student Loan (4.5% APR).
   • All that's left is the student loan. You now hit it with the full force of your avalanche: its $50 minimum + the $625 from the car payment = $675 per month.
   • This final debt will disappear remarkably quickly.

By following this strategy, you have systematically destroyed your debts in the most financially efficient way possible, building momentum and saving hundreds, if not thousands, in interest. You've cleared your path to begin building your Assets in earnest.