Debt is becoming a normal reality for more and more of us. For some, it’s just a mortgage. For others, debt is an almost catastrophic burden on personal finances.
No matter how big your debt is, you’re probably dreaming of getting rid of it. This will strengthen your credit rating and give you more freedom in your personal finances. However, taking action on debt may seem like an impossible challenge.
We humans are slaves to our ways. Therefore, it requires a lot of dedication to focus the money spent on debt repayment. In situations like this, you need a proper plan.
This guide provides you with an in-depth introduction to the avalanche method as a loan repayment strategy. Keep reading and we’ll tell you everything you need to know so you can start striving towards debt-free reality today.
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Loan restructuring
- Different methods of loan repayment
- You need a strategy to get rid of the remaining loan
Avalanche Method
- Avalanche method in a nutshell
- How to arrange debt accounts in the avalanche method
- Benefits of the avalanche method
- Disadvantages of the avalanche method
- How to draw up a payment plan in the avalanche method
- How our loan calculator works
- How to get the most out of the avalanche method
- Motivation
Different methods of debt repayment
Näpyttele lause ”velan maksaminen” hakukoneeseen, niin löydät valtavan määrän erilaisia strategioita, joista valita. Juuri tästä syystä voi olla vaikea tietää kuinka aloittaa parhaalla mahdollisella tavalla. Toimiminen velan suhteen on ensinnäkin haastava tehtävä, ja ilman joitain kohdennettuja ja hyvin jäsenneltyjä ohjeita on helppo luovuttaa ennen kuin on edes päässyt alkuun.
Kun harkitset erilaisia tapoja velasta eroon pääsemiseksi, sinun tulee keskittyä siihen, mikä strategia toimii parhaiten omalle luonteellesi. Se, että ystävä tai perheenjäsen vannoo jonkun menetelmän nimeen ei tarkoita, että se toimii välttämättä omalla kohdallasi.
Paying off debt is about motivation. For most people, debt-free reality and real financial freedom are years away. If the strategy you choose doesn’t work for you, it’s unlikely that you’ll be able to pay off your debt now any faster.
Therefore, it is important to ask yourself a few questions before choosing a debt repayment method:
- What motivates me?
- What does my budget look like?
- How much debt do I have left?
- Do I have loans from more than one party?
- Do I have both unsecured and secured debt accounts?
The answers to these questions are completely individual and must be kept in mind. One thing is for sure: Without a good plan, you will achieve nothing.
You need a strategy to get rid of debt
Whether you specify a destination for your money or not, it will disappear before long This is a sad fact, and you will probably find it every month. Money tends to be spent, whether it’s savings, monthly bills, or general consumption.
In addition, immediate satisfaction motivates people significantly more than long-term goals. If you see something you want today and you don’t have a spending plan for your money, you’ll probably end up buying it.
Studies show that targeted and effective debt repayment requires a strategy. You need to make an informed choice to put money aside for debt repayment. This is the only right way to shorten the loan period.
This is why it is important to think about why you want to get rid of debt and find out what things motivate you financially. Once you have identified these, you can use them in your quest for financial freedom.
It is important for you to ask yourself the following questions:
- How do I benefit from debt relief?
- What goals do I realize after I have paid my debt?
- How does your daily finances in show after I have reached velattomuuden?
One of the most internationally known methods of debt repayment is called the avalanche method. Let’s take a closer look at how this strategy will help you move towards financial freedom.
Avalanche Method
Avalanche method in a nutshell
The avalanche method is used by financial experts and economists around the world and is considered the fastest method to pay off debt. The strategy is designed from a purely financial point of view, which means both advantages and disadvantages for those who choose it.
In the avalanche method, debt is thought of as an avalanche; you start from the top and gradually move down. Interest rates are the guiding factor here, which is why the strategy is so useful from an economic point of view.
Using this strategy, you process your debt account in cost order. The interest rate is always the strongest indicator of the total cost of a loan. This percentage is calculated on the remaining debt on a monthly basis.
Another important feature of the avalanche method is that you process your debt accounts one at a time. Studies have shown that this is the most effective strategy for getting out of debt. When you focus on one remaining amount at a time, motivation stays on longer.
How to arrange debt accounts in the avalanche method
So how do you get started with an avalanche method? The first thing to keep in mind is that this method is best suited for people with more than one debt account to pay. It is also particularly useful if at least one of these loans is unsecured.
There is always a high interest rate on personal loans as well as credit card debts and quick levers. The avalanche method ensures that you get rid of these debts first. This in turn significantly reduces interest costs, allowing you to use the greater part of your payment plan budget to repay your debt. Let’s say you have the following debt accounts:
Quick tip: Loan amount: 355 EUR, Interest rate: 39%
Mortgage loan: Loan amount: 96,000 EUR, Interest rate: 8%
Credit card debt: Loan amount: 11,000 EUR, Interest rate: 17%
Using the avalanche method in this example, you would start with quick leverage and then move on to credit card debt and finally to a mortgage.
Using this strategy, you will pay off your debt in a financially beneficial way. However, it is crucial that you stick to the set monthly payment when you repay your debt.
Once your interest expenses are reduced, you will be able to use this monthly amount more efficiently. This means that the greater part of your budget goes to paying off the actual debt instead of interest.
Benefits of the avalanche method
Choosing an avalanche method to repay your debts offers a wide range of benefits that are both financial and psychological. However, don’t forget that your own nature must always be the deciding factor when it comes to debt repayment. If this strategy does not work for you, choose another strategy.
The biggest and most obvious advantage of the avalanche method is the economy. When you pay off the most expensive debt first, the cost is reduced. This means that you can spend more money to repay the actual debt.
This in turn shortens your loan term, which is especially helpful when paying off unsecured debt. In addition to the interest rate, the loan term has the largest impact on the total cost of these loans.
Most unsecured loans are interest-bearing loans where the interest payable is calculated on a monthly basis. The fewer months the bank lowers the interest rate on the loan, the less it will cost you. With the avalanche method, the road to debt-free is shorter.
The method makes it easier to stay up to date by always switching to a new debt account until you are finally debt free. Overall, the snowball method of debt is beneficial to anyone who wants to get rid of debt. Still, the strategy also has a few drawbacks.
Disadvantages of the avalanche method
Regardless of the strategy you choose, there is always the same big challenge with debt repayment: maintaining motivation. As we mentioned earlier, people are motivated by immediate satisfaction, which makes it difficult to focus on long-term goals.
In the example above, the debt accounts were quite small and easy to manage. In other words, you would probably pay off the debt in a reasonable amount of time. But what happens if the loan with the highest interest rate is also the one with the largest loan amount?
The road to debt-free is long and complicated. You will make a lot of unpleasant choices and you will probably have to refuse the things you really want. This becomes particularly challenging if it takes a long time to get rid of individual debt accounts.
For example, taking unsecured loans, such as a personal loan, is becoming more common compared to secured loans such as a mortgage. With the unsecured loan amounts offered today, you are very likely to find yourself in such a situation.
If you fall into this category and choose the avalanche method of debt repayment, you will need to prepare for several months or even years before you can move on to the next debt account. So before you choose, make sure this is really the kind of strategy that keeps you motivated.
Despite the disadvantages, the fact that the avalanche method is always almost invariably the most economically advantageous option cannot be denied. First, by getting rid of the most expensive debt, you free up money to repay the actual loan instead of using it for interest. However, be aware of the amount of work that unsecured debt requires of you, and make sure the method keeps you motivated throughout the repayment process.
How to draw up a payment plan in the avalanche method
Once you have decided to use the avalanche method, you need a plan. We have already stated that without a targeted strategy, you will not get far in repaying your loans.
- Create a budget for repayment In order to create a payment plan according to the avalanche method, all you have to do is find out the interest rates on your various debt accounts. In addition, you will need to budget for your personal finances. This will help you define a monthly budget for debt repayment.
- Make an overview of your debt accounts We recommend that you make an overview on paper or at least on screen. You can create a simple spreadsheet that lists your outstanding debt accounts, their interest rates, and the minimum amount you can pay each month.
Once these two things are taken care of, you are ready to start repaying the debt. If you can pay more than the minimum monthly amount, count it as a profit. Try to be strict about your spending. If you can reimburse any of your expenses and pay off your debt instead, you might want to try to do so.
How our loan calculator works
The decision to do something about debt is an achievement in itself. Lower debt strengthens your credit rating and ultimately gives you financial freedom. Still, completing the task will not be easy.
To ensure a smooth start, you may want to take advantage of a debt calculator. It creates a payment plan for you, so all you have to do is stay on schedule.
Our debt calculator is a versatile tool that is easy to use. You can select the avalanche method as a debt repayment strategy on the counter.
The calculator uses your debt information to create a structured plan that makes it easier to get started.
To use the debt calculator, you need the following information:
- Remaining loan amount
- Minimum monthly installment of the loan
- Loan rate
- Your monthly repayment budget
- Debt repayment start date
The counter gives you an instant overview of how much you’re actually saving with your new payment plan, as well as when you’ll become debt-free if you follow the plan.
Finally, the debt calculator will give you a detailed monthly payment plan. It also shows how much you lower your loan terms by using the avalanche method instead of the minimum monthly payment.
How to get the most out of the avalanche method
To get the most out of this strategy, follow these steps:
- Stick to a payment plan Although the road to financial freedom is winding, you need to stay tight throughout the debt repayment period. The avalanche method works best when used consistently.
- Set a monthly payment for your account Because you’re working on one debt account at a time, you can set up an automatic payment from your account. This will help you make debt repayment routine and keep you on track.
- Pay as much as you can each month Remember that the reason for choosing an avalanche method is that it will benefit you in the long run. By repaying the loan with a higher monthly budget, you will achieve debt-free faster. As we have seen in this guide, it is especially useful if you are paying unsecured loans.
Motivation
Dreams feed motivation – so give yourself permission to dream. What is something you’ve always wanted or always wanted to do that you haven’t been able to accomplish? It can be a renovation project, a vacation or something.
Calculate how much this dream project would cost you, and then focus your motivation on your debt. How much faster will your dream come true if you get your debts paid off?
Reward Yourself for Success If you are more easily motivated by immediate gratification (like the majority of people), you should make yourself small reward stops during the loan repayment period. Order a cup of coffee from your favorite coffee shop after sticking to your plan for two months. Or Treat yourself to a great dinner once you’ve got rid of your first debt account.
And finally: Don’t forget that debt relief is always a financial gain. It is also called economic freedom for a reason; when you achieve debt relief, you give yourself more freedom to spend the money the way you want.
