Smart Money Podcast: When It’s Time to Focus on Investing Instead of Paying Off Debt

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Hear different perspectives on how to pay off debt — and when to stop paying off debt to focus on investing your money.

When should you prioritize investing over paying off debt? What are different debt payoff methods to help you become debt-free? Hosts Sean Pyles and Elizabeth Ayola and NerdWallet debt writer Tiffany Curtis answer a listener’s question about balancing debt payoff and investing. They start by breaking down the debt snowball and debt avalanche methods of paying off debt, then delve into the pros and cons of investing while paying off debt.

Check out this episode on your favorite podcast platform, including:

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• Spotify

NerdWallet stories related to this episode:

How to Use Debt Snowball to Pay Off Debt

How to Use the Debt Avalanche Method

What Is Debt Consolidation, and Should I Consolidate?

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

This transcript was generated from podcast audio by an AI tool.

Sean Pyles:

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 Pyles.

Elizabeth Ayoola:

And I'm Elizabeth Ayoola. 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 you can email us at [email protected].

Sean Pyles:

Follow us wherever you get your podcasts. And if you like what you hear, please leave us a review and tell your friends. We're back and answering your money questions to help you make smarter financial decisions. This episode’s question comes from Alex, who sent us a text message. Here it is. I have a question regarding loan payoff strategies. I'm currently on a snowball payoff strategy, starting with my higher-interest car loan at 6.9%, but I also have loans at 3.9% and a mortgage at 2.8%. At what rate does it stop making sense to prepay loans to become debt-free and prioritize investing more? Thank you. Alex.

Elizabeth Ayoola:

Well, to help us answer Alex's question on this episode of the podcast, we're joined by Tiffany Curtis, a debt writer at NerdWallet. Welcome back to Smart Money, Tiffany.

Tiffany Curtis:

Thanks, Sean and Elizabeth, I'm happy to be here and I hope I can help.

Sean Pyles:

Oh, I know you will.

Elizabeth Ayoola:

All right, so let's dig into the topic, guys. Our listener mentioned that they're using the debt snowball method to pay off their debt. Can you start by describing what this is for us, Tiffany?

Tiffany Curtis:

Yes. So it's an approach to debt that focuses on paying off your smallest debt first, and once that's paid off, you take the amount that you were putting on that one and you move it over to the next largest balance and then you keep that pattern going. So with every debt that you pay off, the amount of money that you're putting towards your debt grows like a snowball rolling down a hill and slowly getting bigger, hence the snowball method.

Sean Pyles:

Okay, so what would this look like in Alex's case?

Tiffany Curtis:

So in Alex's case, for example, the debt snowball method will look like prioritizing putting more money towards whichever debt has the smallest balance first, which could be the loan with a 6.9% interest rate or the loan with the 3.9% interest rate, while continuing to make the minimum monthly payment on the other debts. Remember, with debt snowball, you're focused on the account balance and not the interest rate, and then rolling that money to the next largest debt.

Sean Pyles:

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?

Tiffany Curtis:

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.

Sean Pyles:

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 easy to mix up. We'll be back in just a moment. Stay with us.

Elizabeth Ayoola:

All right, Tiffany, so how can someone determine which payoff method might be better for them?

Tiffany Curtis:

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.

Sean Pyles:

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.

Tiffany Curtis:

Definitely. So Sean and Elizabeth, our listener is wondering about when it makes sense to focus on investing instead of paying off debt. What do you guys think about that?

Sean Pyles:

While we are not financial or investment advisors and don't give personalized financial advice, I do like to multitask if possible, and that can mean both investing and paying off debt at the same time. And our listener asked about at what rate it makes sense to focus on investing instead of paying off debt. I would say our listener may have pretty affordable debt. Their car loan is a little pricey at around 7%, but their mortgage is at 2.8%. I'm guessing they got that in the early days of the pandemic. And their other loan, which they didn't specify the nature of, is at 3.8%. All in all, that is pretty reasonable, especially compared with credit card debt, which can have an APR well over 20% right now.

Elizabeth Ayoola:

For sure. I think that is reasonable, Sean. And it can, if you're like me and debt is like an itch in your foot, just want to get rid of it, but sometimes you really have to do the math and think about what makes more sense. So on that note, you can compare that with investing in the stock market. Some people have historically been able to get around let's say 10% returns over time, which is pretty decent. So you can get a greater return by investing than by paying off your debt. If you factor in inflation, which erodes the value of your money, then investing can seem like an even better deal.

Sean Pyles:

Right. So a question that our listener can ask themselves is, where can I get the better return on my money? Paying off a credit card with an interest rate north of 20% is likely going to give you a better return than investing in the stock market. But returns aren't the only thing to consider. You do have to think about your own individual circumstances, financial goals, and if having debt is a horrible itch in your foot that you just want to get rid of, that's something to think about too. But I will say, this is a really common question among listeners and it's something that many Nerds deal with too. So Tiffany and Elizabeth, I'd love to hear how you personally approach the balance of debt payoff and investing in your own life, if at all.

Elizabeth Ayoola:

I hope people are not going to throw tomatoes at me because I actually don't have much debt, thankfully.

Sean Pyles:

I'm going to throw roses to you. Congratulations.

Elizabeth Ayoola:

Oh, thank you, thank you, thank you. But I am lucky not to have much debt aside from my car loan, which is more than halfway paid off and the interest rate is honestly relatively low. But at one point, as I said, debt is like an itch in my foot. I was like, "Maybe I should just take cash and pay it off." But since the interest rate is relatively low, I decided the money would have better use in an investing account, compounding, saving for my retirement. Every so often when I can, I do make extra payments. And luckily, because I went to college in London and the cost of higher education over a decade ago was extremely affordable, I don't have any student loan debt. I will add that there are times I have to change the amount of money I am investing and prioritize other goals even though it's not necessarily debt. But when nothing is on fire in my finances, I put large amounts of money towards investing.

Sean Pyles:

So personally, I have a mortgage, a car loan, and student loans. I was lucky to get my mortgage and my car loan back in 2020 when rates were super low. So the loans are basically free money and I'm not in a huge rush to pay those off. And with my student loans, at this point, I resent that I have to pay them at all. So I don't want to give them any more money than I have to. And as I pay off all of my debts, I am contributing as much as I can to my 401(k) and I make monthly deposits into my robo-advisor account so I can get that sweet dollar cost averaging. So right now, in general, I'm more focused on investing than debt payoff because it will give me that better return long-term for my money, in all likelihood, hopefully, if the stock market does what I want it to.

Tiffany Curtis:

Sean, what's the robo-advisor account? Asking for myself and also for listeners who may be unfamiliar with that.

Sean Pyles:

Thank you for the jargon check, Tiffany. I'm so steeped in this world, sometimes I forget that not everyone knows everything I'm talking about. A robo-advisor is just a type of investment account where algorithms manage the investments for you. It makes investing really easy and inexpensive.

Tiffany Curtis:

Okay, thank you for clearing that up for us.

Sean Pyles:

Happy to help.

Tiffany Curtis:

Truthfully, I'm still very new to investing and I don't have any investments beyond a retirement account. I think that with these economic times where it's getting harder for many people to cover their living costs, I'm of the mindset of keeping as much liquid cash as possible. I'm focused more right now on building up my emergency savings account than investing. But if I hit a point where I feel like I can comfortably part with more money, then I'll be willing to risk investing and maybe that'll change.

Sean Pyles:

That makes sense. And I think a lot of people are in a similar situation to you right now. So totally understandable. All right. Well, Tiffany, thank you so much for joining us today.

Tiffany Curtis:

Thank you for having me.

Elizabeth Ayoola:

And for everyone who is scratching their head like “what should I pay down first “I hope you have the answer now. That's all we have for this episode. Remember, we are here for you and we want to hear your real-world questions because we're here to make you smarter about your money decisions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-N-E-R-D. You can also email us at [email protected]. And lastly, visit nerdwallet.com/podcast for more information on this particular episode.

Sean Pyles:

And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. This episode was produced by Tess Vigeland. Sara Brink mixed our audio. And a big thank you to NerdWallet's editors for all their help. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

Elizabeth Ayoola: