At the risk of spoiling the ending for you, I’m not going to tell you whether you should pay off debt or invest your stimulus check, your next raise, your Christmas bonus, your inheritance, or any other money you may find yourself making decisions about. It’s your money. Your responsibility. Your life.

What I will do is suggest you take the time to think through several approaches before you decide what makes the most sense for you. If you’re like me, sometimes you almost wish someone else would come in and mandate a specific “get out of debt plan" on you or force you to invest in X, Y, and Z in such-and-such way. Surely it would be easier and less stressful if we had fewer choices?

Always Pay Off Debt! 

Personal finance guru Dave Ramsey does NOT like debt. In his experience, there’s no real doubt about whether to pay off debt or invest. You ALWAYS pay down debt first. Other than a modest emergency fund, he doesn’t even support the idea of general savings as long as debt is there, costing you more than you’re earning from whatever investments or modest interest rates you may be earning.

Baby Step 1 is to save up $1,000. Baby Step 2 is to pay off all debts except for your home. The third Baby Step is to fully fund an emergency fund of three to six months of expenses. Baby Step 4 is starting to save for other things…

The team at Motley Fool feels much the same. Like Ramsey, they insist on making sure you have enough to live on for 3 – 6 months in a designated emergency fund.

Everything else should be committed to paying off debt. Our small savings accounts or modest retirement investments do little good, they argue, if we’re drowning in debt. It’s like trying to take a shower while the house is on fire when that water could be better applied to quenching the flames.

Credit card debt is the most expensive form of debt, and it's only getting pricier. If seeing a credit card balance hover over your monthly statements makes you want to double down on your debt repayment plan, you're on the right track. Putting every last cent possible toward your credit card balance could save you hundreds, or even thousands, of dollars, along with cutting years off your debt repayment timeline.

That’s after you’ve built up that emergency fund, of course. Let’s not lose sight of that caveat!

Mostly Pay Off Debt

The folks at Equifax are slightly less dogmatic, but they largely agree – at least on the basics. Equifax is one of the big three credit bureau agencies responsible for calculating credit scores and providing businesses with your complete credit history upon request.

That service is only part of their larger focus on data and analysis as the key to making better financial decisions. In other words, they know a thing or two about how personal finance works in both the short term and the as part of the bigger picture. 

The problem for many Americans is that their debts are so significant compared to their monthly income that it will take many years to pay the balance down to zero. While it might be tempting to simply postpone saving while you’re paying off debts, that often isn’t a realistic option. Even families with high debt want to be able to purchase a home, have a child, pay for college or provide support for ailing loved ones — and that requires substantial savings.

The key, then, is to find the balance that works for you and your family, agree on a plan and stick with it. Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you’ve paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.

Invest Extra Cash (At Least Some)

You won’t find many legitimate sources advocating for extensive savings or investments while you’re drowning in debt. The math simply doesn’t support it. There are those, however, who are at least a little more willing to outline the advantages of saving or investing when you have a little extra cash. 

Depending on where you live, you may not be familiar with Fulton Bank. They’re a major player in much of New England, and detail several reasons it might make sense to invest even before you’ve completely paid down your existing debt. The biggest of these is the nature of investments and compound interest. 

Perhaps the best reason to apply money-saving tips to your financial life as early as possible is compound interest. Compound interest refers to the interest earned on your interest, either in a savings account, money market account, CD, or investment account. The more time your money has to compound, the more it can grow. Waiting even five or 10 years to start saving can make a significant difference in how much you'll accumulate over time.

Strategic savings might actually help you eliminate overall debt by reducing the number of times you make purchases using credit. It’s safe to assume that at some point in the next decade you’ll need auto or home repairs. If you have kids, chances are good they’re going to want some sort of education after high school. They may eventually choose to marry. You’ll probably have at least one situation requiring medical care beyond your standard visit to the doctor’s office.

Each of these are potentially big-ticket items we traditionally pay for with loans or – worse – credit cards. Saving in advance means we’re less likely to pay down debt for ten years only to end up back where we started. Mathematically that may not actually be what’s happening, but emotionally and psychologically…

Finally, when it comes to saving, we believe opening a savings account is one of the greatest ways to do so. Below we listed out some of the best options on the market:

Don’t Pay THAT Debt!

The folks at Forbes (UK) actually offer several scenarios in which focusing on debt reduction might prove counterproductive. For example, if you’re earning a decent amount of interest on something (which is easier said than done these days) while paying 0% interest on your vehicle financing or credit card, perhaps you let that ride for a while. The danger, of course, is that those sorts of no-interest promotional offers tend to expire and be suddenly replaced by higher-than-average interest, thus shooting the overall benefit right to—

Well, it’s not good when that happens. 

Some loans still carry early payment penalties. While not as common as a generation ago, it’s worth verifying that you won’t actually lose money by paying extra towards your mortgage or vehicle financing. In that situation, it’s best to stick with the agreed upon terms and channel any extra into something productive like a 401(k), IRA, or the new Taylor Swift CD. 

One strange scenario is that of student loans. Like mortgages, these are very detail-specific, so it’s absolutely essential that you pay attention to the details before making big decisions. With some loans, however, repayment is contingent on your employment, income, or a certain time frame. I’d never suggest taking advantage of loopholes in a malicious way – we’d all like to be able to sleep at night, after all.

That doesn’t mean we shouldn’t pay attention to the rules and figure out what makes the most sense for our specific circumstances, however. (My wife hasn’t paid a dime of credit card interest in decades. She’s nevertheless earned enough through the cash-back feature of her primary card to buy a brand new MacBook Pro with credit left over. Whenever I start to feel like I have my personal finances pretty together, I remember things like this and I’m humbled all over again.)

If you’re not required to pay towards your student loans until you hit a particular threshold, and you’re not there, it might make sense to wait. This is particularly true of the loans are scheduled to be written off or forgiven after a certain time period without impacting your credit score. 

Let’s Get Stimulated

Easy, Tiger – it’s not that kind of website. Let’s just assume for a moment that some sort of stimulus bill has passed by the time you’re reading this, or that it will. If not, you’ve come into a few bucks some other way – a gift, a bonus, passing “Go” on the Monopoly board of life. You have $250 of hot sexy cash ready to spend any way you like. What do you do?

I’m going to go totally rogue and just admit up front what most of us are thinking. Get dressed, kids – we’re going to dinner at a real sit-down restaurant for once! (OK, maybe carry-out…) We’re finally buying a decent Blu-ray player! Good news, honey – you can finally buy that second pair of shoes. No more working on your feet all day wearing flats! I realize most of the major financial sites would rather resort to funny cat videos than allow for the possibility we might choose to enjoy ourselves with those we love when money allows. And let’s be honest – that’s how many of us ended up dealing with debt to begin with. I’m not promoting carelessness or irresponsibility. But I’m also not going to tell you that you’re going to personal finance jail for doing something nice for the family or significant other with your bonus funds. Besides, we’re supposed to be stimulating the economy, right?

And as long as we’re coloring outside the lines, you’ll get no abuse from me if you take $25 of that windfall and drop it in the red can for that frozen bell-ringer outside the department store. Or the offering plate. Or PayPal it to the ACLU. The point is, it’s OK to support thing you care about, even if your balance isn’t what you’d like. 

Now that we’ve got that out of the way, what about however much is left of our fictional $250? Here’s my personal walk-through of considerations, from the most critical to the still-pretty-important. 

For this scenario, I’m not talking about wishing I could lower my balances or get a handle on overall debt (as important as both of those are). I’m talking there are bills due or past due right now that I can’t pay otherwise. Whatever our other aspirations, we should start with whatever’s sitting in the mail pile right now demanding attention. Once that’s clear, you come back and develop a better budget and general strategy so THAT doesn’t keep happening. 

Let’s see… do three dollar coins, a gift card to Five Guys, and an old stick of gum count? If you don’t have enough to live on for at least three months in easily accessible savings, add this cash to the fund. If you don’t have an emergency fund, do you know what makes a GREAT investment for getting one started? I’d say something in the neighborhood of $250. 

One of the most notable characteristics of any proud American is our inability (i.e., “utter refusal”) to plan more than an hour or two ahead for most things. If you know you have bills coming due, specials occasions coming up, or other predictable expenses, how about we use this to pay for them instead of incurring further debt?

Whether you’re using the so-called “snowball method,” the “avalanche method,” or some other system, you’ll rarely go wrong paying an extra $250 to reduce debt. That may not be as much fun as some of the other options, but it beats eating cat food when you’re 78. 

Of course we should save for retirement as early and often as possible. $250 invested now, particularly when added to whatever’s already there, can bring exponential returns a few decades down the road. You know, when you’re far more likely to REALLY need it. 

Conclusion

Consider your options, then make the best call you can. After that, you look back only to learn and adjust. There’s no point in second-guessing yourself eternally. Pay off or invest, give away or keep, it's your money and your decision - try to feel good about whatever you decide.

Whether you receive a stimulus payment or not, have an emergency fund or not, have a plan for retirement or not, remember something: you can do this. You can make changes. You can move forward. You can make good things happen. You can’t control everything, but you can control some things. 

It may not be quick, it probably won’t be easy, but it IS possible. And you don’t have to figure it all out alone. Let us know if we can help.