You will be able to explain why paying the highest-rate debt first saves the most interest.
Mei Ling's page from lesson 6.1 shows three debts and about S$264 of extra repayment money this month. Her first instinct is to split the extra three ways so that all of them go down together, which feels fair to each lender and is the slowest and most expensive way to use the money, because it treats a 26% debt and a 6% debt as if they cost the same.
The avalanche method fixes that with one rule.
Pay the minimum on every debt, every month, on time. Then send all of your extra repayment money to the one debt with the highest interest rate. Nothing extra goes anywhere else.
When that debt is cleared, take everything you were paying on it, the minimum plus the extra, and add it to the payment on the debt with the next-highest rate, and keep going like that down the list until nothing is left.
The name comes from the way the payments build. Each cleared debt frees its payment to join the next one, so the amount hitting each later debt is larger than the one before.
To sort your list for the avalanche, order the debts by interest rate with the highest first. Use the EIR for loans so the rates are comparable. The size of each balance plays no part, so a S$500 debt at 26% goes above a S$20,000 debt at 4%.
Her list, sorted by rate, with figures made up for the example: the credit card, S$9,000 at 26%; the personal loan, S$6,000 at 8%; the sofa instalment plan, S$1,500 at 6%. She has S$800 a month for debt.
Each month she pays S$200 on the loan and S$60 on the sofa plan, and everything else goes to the card. In the first month that is about S$540 on the card: its minimum of about S$276 plus the S$264 of extra money. As the card balance falls, its minimum shrinks and her extra money grows, but the card keeps receiving everything left over from the S$800.
On these figures, the card is cleared in month 21. From month 22, the S$540 that was going to the card moves to the next-highest rate, the personal loan, on top of its own S$200. The loan and the sofa plan are both cleared in month 25.
Total interest across all three debts comes to about S$3,033. Of that, about S$2,287 is on the card, which carried the highest rate for the longest, and the rest is on the two loans. Lesson 6.4, Run avalanche and snowball on a worked example, shows the month-by-month model behind these figures.
Every dollar of extra repayment stops costing interest at the rate of the debt it pays off: 26% a year for a dollar off Mei Ling's card, about 6% for a dollar off her sofa plan. Put S$100 on the card and she saves about S$26 a year in interest. Put the same S$100 on the sofa plan and she saves about S$6.
The avalanche puts every extra dollar where it saves the most. The expensive debt shrinks fastest, so less of the total balance is sitting at the high rate each month. You saw the same logic in The Singapore personal finance system, lesson 6.1, Rank your debts and clear the expensive ones first: paying off a debt at a given rate is the same as earning that rate with no risk.
Mathematically, no other order of repayment, with the same monthly budget, saves more interest. That is the whole case for it.
Look again at Mei Ling's timeline. For 20 months, every extra dollar goes to the card, and the card is the largest balance. Her list still shows three debts for nearly two years, and none of them disappears. The sofa plan and the personal loan shrink only by their minimums, and the card shrinks slowly at first because of its high rate.
For many people that is the hardest part. A plan that works on paper only works if you keep following it, and a long stretch with no visible progress tests motivation. Some people give up partway, or quietly start splitting the money again, and lose much of the saving.
There are ways to make the wait easier. Track the card balance month by month on a chart, so the fall is visible even while the debt count stays at three. Mark milestones such as the balance dropping below S$5,000. And set up your payments by standing instruction from your bank account, so the plan runs itself and does not depend on willpower each month.
If you know from experience that you need early wins to keep going, the next lesson, 6.3, The snowball method: smallest balance first, is the alternative.
Take your page from lesson 6.1 and sort it by interest rate, highest at the top. Use the EIR for every loan and the statement rate for every card. The order you end up with, from top to bottom, is the order you would pay your debts under the avalanche method.
Sort your debt list by interest rate, highest first, and write the order you would pay them under the avalanche method.
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