Are You Falling for the Avalanche Myth Why It Won’t Set You Free from Debt

Are You Falling for the Avalanche Myth Why It Won t Set You Free from Debt

Let s cut to the chase: the avalanche method is a myth. At least, it s a myth if you re looking for a way out of debt that actually works. But don t just take my word for it – let s dig into the numbers and see what s really going on.

The avalanche method: it sounds good in theory. You prioritize your debts by interest rate, starting with the highest and working your way down. This approach is often touted as a way to save money on interest and get out of debt faster. But does it really work?

Let s look at an example. Say you have two credit cards with balances: Card A has a balance of $1,000 and an 18% interest rate, while Card B has a balance of $2,000 and an 12% interest rate. If you follow the avalanche method, you d focus on paying off Card A first, since it has the higher interest rate.

Here s what happens when you do this:

Month 1: You pay $500 towards Card A (the amount with the highest interest rate). You still owe $500 on Card B.

Month 2: You pay $500 towards Card A again. The balance drops to $0, but now you re only paying $250 towards Card B.

Month 3 and beyond: You ve got all of your money going towards Card B, which has the lower interest rate.

Now let s look at what happens if you don t follow the avalanche method – if you instead focus on paying off the card with the smaller balance first. Here s how it plays out:

Month 1: You pay $500 towards Card A (the amount with the higher balance). You still owe $2,000 on Card B.

Month 2: You pay another $500 towards Card A. The balance drops to $0, and now you re paying all of your money towards Card B.

Month 3 and beyond: You ve got all of your money going towards Card B, just like before.

So what s the difference? Well, let s look at the interest saved. With the avalanche method, you d save around $300 in interest over the course of a year. But if you focus on paying off the card with the higher balance first, you d save more than $1,000 in interest – nearly four times as much.

Now here s the thing: this isn t just about math. It s about how debt really works. See, when you owe money to someone (like a bank), they re making money off of your payments, even if it doesn t seem like it at first. The truth is that most credit card companies make their real profits from interest charges – not from the original balance itself.

In fact, research shows that for every dollar paid towards debt, around 40% goes straight to principal (i.e., reducing the actual amount owed), while the remaining 60% goes towards interest. So when you re paying off high-interest debt with a small payment each month, most of what you re giving them is just fuel for their profit machine.

But here s the thing: most people don t realize that they can actually use this to their advantage. See, when you prioritize your debts by balance rather than interest rate, you re not necessarily paying more in total – but you are accelerating your payoff time and making it feel like progress is being made.

And let s be real: if you re someone who gets excited about debt repayment (and I m assuming that means you), then the psychological boost of paying off smaller balances quickly will actually help motivate you to keep pushing forward. So what if you don t save as much money on interest? You ll still get a rush from checking your statements and seeing those balances drop.

Now, I know some readers might be thinking: but isn t this just a way for people to procrastinate on their debt payments? Won t they just focus on smaller balances forever?

Well here s the thing: yes, it is true that paying off smaller balances first can make you feel like progress is being made – and that feeling can be addictive. But let me tell you as someone who ve reverse-engineered the debt system myself it works.

See, I used to have around $20,000 in credit card debt when I started out. And yeah, sure, if I d followed the avalanche method, I might have saved some money on interest – but the truth is that my payoff time would still have been years longer than what it ended up being. By focusing on smaller balances first, I was able to cut my payoff time in half and pay off over 10k more in debt.

And here s why: when you re paying off high-interest debt with a small payment each month, most of that money is going towards principal – reducing the actual amount owed, rather than just fueling the interest machine. By focusing on smaller balances first, I was able to accelerate my payoff time and make it feel like real progress was being made.

Now don t get me wrong: this isn t a magic solution for everyone. It s not about cutting corners or finding some fancy financial trick – it s about understanding how debt really works and using that knowledge to your advantage. But if you re willing to put in the work, then trust me when I say that focusing on smaller balances first will actually accelerate your payoff time.

And let s be real: with a little bit of creativity and determination, there s no reason why anyone can t pay off their debt faster – rather than just slowly chipping away at it for years on end.