debt
Debt Avalanche Method
The debt avalanche method pays off debts in order of highest interest rate first. It minimises total interest paid and is the mathematically optimal debt payoff strategy.
By attacking high-rate debt first (e.g. 22% credit card before 5% student loan), you reduce the total interest accrued. The difference can be thousands of dollars over several years compared to the snowball method.
The avalanche works best for disciplined people who can stay motivated without immediate payoff wins. If high-rate debt also has a large balance, it can be months before any single debt is fully eliminated.
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- Debt Snowball Method
- The debt snowball method pays off debts from smallest to largest balance, regardless of interest rate. Each paid-off debt frees up cash to accelerate the next — creating a growing 'snowball' of payments.
- Debt-to-Income Ratio (DTI)
- The debt-to-income (DTI) ratio is your monthly debt payments divided by your gross monthly income, expressed as a percentage. Most lenders require a DTI below 43% to qualify for a mortgage.
- Net Worth
- Net worth is the total value of everything you own (assets) minus everything you owe (liabilities). It is the most comprehensive single-number measure of financial health.
Frequently asked questions
What is Debt Avalanche Method?
The debt avalanche method pays off debts in order of highest interest rate first. It minimises total interest paid and is the mathematically optimal debt payoff strategy.