NerdWallet's Smart Money Podcast
Crush Debt or Grow Investments? How to Make the Best Choice for You
Thu, 19 Dec 2024
Learn how to tackle credit card debt, build savings, and decide between debt payoff and investing for financial growth. How can you pay off credit card debt faster and smarter? When should you prioritize paying off debt over investing your money? Hosts Sean Pyles and Sara Rathner discuss credit card payoff strategies and building an emergency fund to help you strengthen your financial security. They begin by talking to Adam, a Smart Money listener, who has questions about what to do with a windfall. They discuss options for paying down high-interest credit card debt, with tips and tricks on using balance transfers wisely, automating payments and reducing financial stress. They also discuss whether to prioritize debt payoff, fund investments or save for other financial goals — before getting into strategies for balancing long-term retirement planning, managing 0% APR debt effectively, and enjoying life without derailing financial progress. Then, host Elizabeth Ayoola and NerdWallet debt writer Tiffany Curtis join Sean to answer a listener’s question about loan payoff strategies while deciding when it’s better to focus on investing versus debt repayment. They explore the pros and cons of the snowball and avalanche debt payoff methods, how to calculate returns from paying down debt versus investing, and strategies for multitasking financial goals to build a stronger financial future. In their conversation, the Nerds discuss: paying off credit card debt, prioritize debt or investing, snowball vs avalanche method, balance transfer tips, high-interest credit cards, emergency fund savings, how to pay off debt, investing vs paying debt, debt payoff strategies, personal finance tips, managing debt, 0% APR credit card, financial windfall tips, credit card debt help, debt-free planning, emergency fund tips, investing basics, save for retirement, Roth IRA strategies, 457 retirement plan, credit card payoff calculator, budgeting for savings, automating finances, debt-free goals, financial security tips, financial planning for families, saving for college, 529 plan benefits, high-yield savings accounts, avoiding credit card interest, tips for financial independence, and when to invest. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend.
Chapter 1: What are the best strategies for paying off credit card debt?
Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. If there's one question we get more often than any other on the show, it's probably what's the best way to pay off debt. That goes for debt of all kinds. Mortgage debt, student loan debt, credit card debt, car debt, you name it. If it's a debt, we get questions about it.
And there's always lots of news around debt, news that we've covered throughout the year. So today for our special series featuring the best of smart money 2024, we are reaching back into the archives for our favorite segments about debt and how to pay it off. It's a best of for best practices. Now onto the show.
Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles.
And I'm Sarah Rathner. If you have a money question for the nerds, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com.
Follow us wherever you get your podcasts. And if you like what you hear, please leave us a review and tell a friend. In this episode, we are talking with a listener, Adam, who's 35 and lives in Colorado. Adam has some questions about what to do with a windfall, whether it's wisest to use it to pay off credit card debt or invest it. Adam, welcome to Smart Money. Thank you, Sean. Thank you, Sarah.
Happy to be here. Great to have you on. So let's start by getting to know you a little bit, in part because I know Sarah and I, and I'm sure our listeners are nosy people. So tell us a bit about your financial life right now. What's your income like, your debts, your financial goals, the whole spectrum of things?
Sure. So I'm happily married with two little boys. One's four and one's a year and a half. We live in Colorado. I work full time as a professional firefighter and my wife works in the restaurant industry. We have a pretty healthy retirement thanks to a state pension that I'm a part of. And we live comfortably. We own our house. We have two cars. We're very fortunate to have a roof over our heads.
But we do have some credit card debt that set us aside. You You know, I need, I break my tooth or what have you. We've had a couple expenses. So we have that and we're trying to build a college fund for our children with the 529s. Other than that, we're just your normal average Americans trying to plug through life and provide the best life we can for our children.
Well, it seems like you've checked a lot of the American dream boxes there with kids and a house and a retirement fund. So that's great to hear. Congratulations on achieving that because by 35, that's a lot to accomplish, especially for folks in our generation. And before we get too far into this conversation, I did want to remind folks that we are not financial or investment advisors.
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Chapter 2: How should you allocate a financial windfall?
Right. And the debt snowball method is often compared with the debt avalanche method because we love our snow analogies in the debt payoff space, I suppose. So can you talk about how this one works?
Sure. We do love a good snow analogy. I think that having a visual of your debt payoff, be it snowballs or something else, it can help make it a little easier to understand the method. So the debt avalanche is the opposite of the debt snowball method.
Instead of focusing on paying off the smallest debt first, you tackle the debt with the highest interest rate first while making the minimum monthly payment on your other debt. And then you roll that money into the next highest interest debt and then you keep it going.
So with our listener Alex's debts, they would focus on paying off that 6.9% car loan, then the loan at 3.9%, and then the mortgage at 2.8%. And thinking about their question, I'm kind of wondering if they're actually doing the avalanche method instead of the snowball, because they can be kind of easy to mix up.
All right, Tiffany, so how can someone determine which payoff method might be better for them?
Well, first, I think it helps to figure out whether you'll be more motivated by small and quick wins, which you get with the debt snowball method, or if you're more of a patient and analytical person who can stick out the debt avalanche method, which may take longer. So paying off your smallest debt first may give you the energy to stick out paying off your debt, while the debt avalanche method
could lead to you growing weary, especially if your largest debt is also the one with the highest interest rate. At the end of the day, I think the best payoff method for you depends on your goals and how you approach money. So you have to be honest with yourself.
I think that's a really good point, Tiffany, because people love to argue about the debt snowball and the debt avalanche method and say one is always the best way to go. A lot of people who are more mathematically minded perhaps may say avalanche is always the best because it can save you money depending on how your debts are structured.
I tend to prefer the snowball personally because I think that psychologically people paying off debt and getting the benefit of closing out an account can keep people going over the long run because debt payoff can be quite a slog. But like you said, Tiffany, it really all depends on your own personal circumstances, how you are mentally and your financial goals.
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