The Debt Avalanche
Eliminate the highest-interest debt first while maintaining all minimums
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 98%
The debt avalanche orders repayment by interest rate rather than balance size. First identify the debt charging the highest rate. Continue making minimum payments on every other account, then direct all available extra cash to that highest-rate debt until it is gone. Repeat with the next-highest rate. Collins describes paying down the costliest debt as the largest available return on repayment money because it removes the greatest ongoing interest charge. The process may demand substantial lifestyle adjustments, especially when pursued quickly. Its longer-term advantage is behavioral as well as mathematical: once the debts are gone, the borrower has learned to live below income and redirect the difference toward a chosen objective. That same cash flow can then move from debt repayment to asset building.
Origin
Collins presents this method when the host asks how he would advise a friend carrying about $40,000 in debt.
Core principles
- 01Interest rate determines the immediate financial drag
- 02Minimums protect every account while one balance is attacked
- 03Each cleared debt releases cash flow for the next
- 04Repayment discipline can become investing discipline
How to run it
- 1
Inventory the debts
Record each balance, minimum, and interest rate, then rank accounts by rate.
Pro tip Use interest rate, not balance size, as the ordering rule.
Watch out Do not ignore any account while focusing on the target.
- 2
Protect every minimum
Keep making required minimum payments on all debts.
Watch out Missed minimums can undermine the plan.
- 3
Attack the highest rate
Send every additional repayment dollar to the costliest debt until it is eliminated.
Pro tip Faster repayment reduces accumulated interest.
Watch out Faster progress usually requires harder short-term spending changes.
- 4
Roll payments downhill
Apply the cleared debt's former payment to the next-highest-rate debt and repeat.
Pro tip Keep the total monthly repayment amount constant.
- 5
Convert repayment into investing
After elimination, preserve the lower-cost lifestyle and redirect freed cash flow into assets.
Pro tip Automate the transfer.
Watch out Lifestyle inflation can erase the new surplus.
In the wild
An illustrative borrower has credit-card, car, and student-loan debt at different rates. They maintain all minimums, send every extra payment to the highest-rate credit card, then roll that payment into the car debt and finally the student loan.
→ The borrower removes the most expensive interest first and eventually frees the repayment amount for investing.
Common mistakes
Spreading extra payments evenly
Dividing extra money delays removal of the costliest interest charge.
Re-expanding spending afterward
Using freed cash flow for new consumption wastes the discipline developed.
Is it for you?
Best for
It is best for borrowers with several debts who can consistently pay more than the combined minimums.
Not ideal for
It is not ideal when minimums are unaffordable or urgent professional debt advice is required.
From the transcript
“I would pick the one that was charging me the highest interest rate.”
“I'd pay the minimums on all the others.”
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