Financial advisers often have different opinions on how you should pay off debt, and sometimes advise against it and recommend using your spare money to invest rather than to payoff debt.

If; for example, you had; or could obtain, $10,000, should you invest that money or use it money to pay off debt?

In the first example, if an investment could yield a higher rate of return than what your debt is costing you, it may be wiser to invest that money. But, if investing won't outweight the debt cost, then certainly you should pay off the debt.


Which is best for you?

If you are paying 16% interest on your credit card, it's not likely that you could continually earn at least 16% with no risks on an investment. By paying off the credit card balance, you are somewhat investing your money to prevent further loss.

But don't go too wild on paying off debt, because some debt is good for you and your credit rating. Mortgages; for example, are a good debt, because it's more like an investment since it can yield accrue equity. Plus the interest you pay is tax-deductible. Let's say you have a 6% mortgage and you pay a 35% income tax rate, the after-tax cost of your mortgage is only 3.9%.

Credit card debt; although a credit card can help improve your credit score, is overall a bad debt. The interest you pay on credit card debt is not tax deductible.

A vital investment need is for retirement, and many financial planners suggest investing in a retirement program before you pay off debt.

As a minimum, you should put the amount you need to invest in a 401(k) to get your company's match; If they match 50% on the first 6% of pay you invest in a 401(k), you've got a 50% return.

Paying off a car loan vs a credit card debt: Paying off an auto loan won't give you ready access to a line of credit, whereas your available credit line would increase if you paid off a credit card. The risk here is that; if you have an emergency cash need, you wouldn't be able to get it as quickly as you could with a credit card.

Yet there's another consideration - Paying off debt starting with those that charge the highest interest rates is not always the best choice.

Sometimes paying off the credit card with the lowest balance will instill greater effort by you to continue paying off other credit cards and debt, because you get a 'high' from the success.

Once you get the lower interest card paid off, use the monthly you would have spent on its monthly payments to pay off the next card.

Paying off a mortgage: Most financial planners will advise against it, because typically mortgage interest is low (by comparison), is tax deductable, and your money could be better spent on investing. So, consider paying off other debts first.

Overall, advisors agree that long-term retirement saving and an emergency fund should come before any short-term decision to pay off debt. And if you're saving for a short-term goal; such as buying a house, then focus on that above all else.

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