Education

To some credit counselors, debt avalanche method is ideal to make full use of your money to make you debt free. To others, it lacks motivation, so it should not be recommended. What is the reality?

Debt Avalanche method is a logical method of reducing your debt. When your debts have reached to the peak, you are looking out for a solution which will work. After all, you dont want to file bankruptcy. No doubt your resources are limited, but you are determined to bring your debts down to earth. In this situation debt avalanche method is ideal.

In this method, you list all your debts in order of the rate of interest charged on them. The debt with the highest rate of interest will be on the top of the list. Then you should find out the minimum payment requirements for all your debts, make a total and provide for such payment. Then you have to estimate how much extra money you will be able to pull towards repayment. This extra money has to be applied towards the repayment of the date on the top of your list. As the rate of interest is highest on that debt, you are utilizing your resources ideally. Once you finish up paying this debt, you will turn to the second highest debt. You should be able to clear this debt faster than the first one because you will have more money now at your disposal. If you continue the payment process as per the plan, you will pay all your outstanding debts in a record time.

Logically this method looks good. The main objective of this method is to save you from the interest burden as far as possible. This saving can be utilized for repayment and this will make your debt free faster. However there is no emotional encouragement for you in this method. Then debt on the top of your list may be huge and it may take a very long time for you to repay it. During this time, you may get frustrated as your will go on paying but will not see results in terms of number of debts you owe. There are good chances that you may give up this effort in the middle in frustration. To the contrary, if you are asked to repay the smallest debt first, irrespective of its rate of interest, you may be able to clear them in a very short time. This initial encouragement is very important. This instant gratification will give you strength to pay the other debts.

Another drawback of this method is it takes into account all static loans like mortgages or auto loans. The amount involved in such loans may be high and if they are on top of the list, it may not be possible for you to get rid of them soon.

For this reason, credit counselors are reluctant to recommend this method. People who are panic about their debt are not going to make logical and rational decisions about their money matters and if they dont see quick success, the entire effort goes waste.

Different methods of paying of your personal debts will have different approaches. But the important factor is strong desire from inside to pay off the debts. If you are really convinced about the dangers of bankruptcy, you will take a realistic and not emotional approach. When you are dealing with money matters, you have to accept that one plus one equals two.

Loans have become a part of life. However, with heavy rates of interest, the total burden of debt becomes unbearable. Even the thoughts of the huge outstanding balances may scare you. But you can clear these balances if you have a strong willpower. Debt Avalanche method can prove very useful. What are the strengths of this method? What are its weaknesses? Chintamani Abhyankar discusses the method in detail.

About the Author:

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.