FINANCIAL FOCUS: What’s smarter — paying off debts or investing?

Joe Faulk

Joe Faulk

Published: Tuesday, July 8, 2014 at 01:53 PM.

When you have disposable income, how should you use the funds?

Assuming you have adequate emergency savings — typically, three to six months’ worth of living expenses — should you pay off debts or fund your IRA or another investment account?

There’s no correct answer — and the priority of these options may change, depending on your financial goals.

First, consider what type of debt you’re thinking of paying down with your extra money. If you have a consumer loan that charges high interest — and you can’t deduct interest payments from your taxes — you might conclude that it’s a good idea to get rid of this loan as quickly as possible.

Still, if the loan is relatively small, and the payments aren’t really impinging on your monthly cash flow that much, you might want to consider putting any extra money you have into an investment that has potential to offer longer-term benefits.

For instance, you might decide to fully fund your IRA for the year before tackling minor debts. (In 2014, you can contribute up to $5,500 to a traditional or Roth IRA, or $6,500 if you’re 50 or older.)

When it comes to making extra mortgage payments, however, it's more complicated. Mortgage interest is typically tax deductible, which makes your loan less “expensive.” Even beyond the issue of deductibility, you may feel that it’s best to whittle away your mortgage and build as much equity as possible in your home. But is that always a smart move?

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