Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
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This week’s episode starts with a conversation about how to craft and achieve your money resolutions in the new year.
Then we pivot to this week’s money question from a listener’s text message:
“I’m carrying less than $5,000 in credit card debt, around $25,000 in student loans, and I just bought a condo. I’d like to buy a house in a few years and keep the condo as a rental property. Am I better off to use ‘extra cash’ to pay off debt, pay extra on the mortgage, or build a pile of cash for the next down payment? Thanks!”
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To know what you want to accomplish with your money in the new year, start by visualizing your life a year from now. Do you see yourself with a new house, a new job — or maybe both? Once you have a clear idea of where you want to be, you can begin making a plan to get there. The SMART method of goal-setting can help. Make money goals that are specific, measurable, attainable, relevant and time-bound. As you make progress on your goals, be sure to reward yourself along the way.
If you’re trying to pay off debts while balancing other financial priorities, start by analyzing your debt load and different approaches to pay it off. If you’re dealing with high-interest debt like credit card debt or a payday loan, that should take precedence over a goal like building up a down payment for a second home. On the other hand, if you have low-interest debt like student loans or a mortgage, you can probably pay off this debt over time while working toward other goals. Regardless of your debt load and financial goals, it’s a good idea to multi-task by saving for retirement or contributing to an emergency fund while you pay off what you owe.
Also, think through a few different ways to pay off your debt. If you’re paying off multiple debts with similar interest rates but varying balances, the debt snowball method may be a good route to go. With this tactic, you pay off your smallest debt first while making minimum payments on your other obligations. Once the first debt is paid off, you roll the amount you were paying on it into your next-largest debt. As you pay off multiple debts, you’ll build momentum, much like rolling a snowball down a hill. The debt avalanche method is …….