Pay Off Debt or Create New Investments?

Congratulations, you've generated some extra income! Now, do you pay off debt, or make a new investment?

It can be hard to determine which course of action will best benefit you at any point in time. Every April (or shortly thereafter), a lot of people get that tax refund and see "extra money." Now, what's the best use for it?

If you get that tax refund or bonus every year, you may have to face the debt vs. investment question once or twice a year. Of course, the best decision for you will depend on your personal financial situation.

Here are the two big things to think about in making this decision:

1. The rate of return. It's all about the numbers if you go this way. For extra money, what's the absolute best use? Since not all debt is equally important to pay off, the solution isn't always obvious and clear. When you're talking about lower-interest debt, it's better to invest the money. Low-interest debt includes student loans, mortgages and many other long-term loans.

Credit card debt usually has much higher interest rates, and costs you a lot more. Credit cards typically have the highest interest rates, so pay off that debt as soon as you can. At this point, it's much more advantageous to pay off the debt than invest. It makes for a better rate of return.

* This might require some homework - dig into your bills and statements to find those interest rates. Find the ones that are costing you the most before making any decisions.

* Now, it's also important to be saving for retirement, so we need to consider those options too. How about a 401K plan where you work? Lots of people have them, and it's important to know if your employer makes matching contributions. Basically, you double your investment money when you contibute the matching amount added to your 401K by your employer, so be sure you do it.

2. Your feelings. You should look at more than the numbers, considering your own feelings as well. Be open to new ideas - what's the best use for that extra money? If you have a significant windfall, do you feel best investing it or using it to repay a large portion of your mortgage? It's a matter of setting financial goals... look at the top of your list of priorities.

* It's important to make the decision that you'll be happiest with, so consider all options before applying money to one or the other.

* Get a second opinion - that can include paying a professional investment advisor, or just chatting with trusted family and friends. They'll probably give you options you hadn't thought of before.

Two Important Considerations

Here are two more important things to consider as you create your financial plan:

* Be sure you have an "emergency fund" so you'll have money in the bank in case there's a financial emergency.

* If your company has a 401(k), begin investing in it as soon as you can, even if you cannot invest a lot at first. No matter the amount - be sure to make your 401K contribution and get the matching money from the employer.

Keep in mind that very rarely do you have to rush to a decision. You should think about both the long-term and shorter-term future, and doing what will be the best benefit for you and your family. This is time well spent - and your good decisions here will affect your family's financial bottom line. Put these tips to work to make good decisions for your future.