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Question:


“I just landed a new job and my salary is significantly more than I was making in my previous job. I have some credit card debt, a student loan and a car loan. Am I better off paying down my debt or investing my excess income?”
-mwolff369


Answer:


First off, congratulations on the new job. They’re not easy to come by these days. The short answer to your question may be: None of the above. Financial planners encourage people to set aside a healthy amount of cash to handle emergencies, say enough to cover six months of living expenses, in a bank or money-market account to avoid risk and ensure instant access.
 
Paying into a pension plan might be your next priority. The tax breaks and matching employer contributions almost certainly will make it worthwhile. If your new employer, the one who’s paying you that fat salary, doesn’t offer a pension plan, then you should consider starting an individual retirement account.
 
Once you have your emergency fund and pension arrangements squared away, the choice between paying down debt and investing is fairly simple. Compare the rates you’re paying on the debt with the rates of return that you can reasonably expect in the financial markets and put your money wherever you get the best deal.
 
 
If you have a credit card that charges 10 percent interest and you bring down the balance by $1,000, it’s the equivalent of putting $1,000 into an investment with a 10 percent return. In both cases you’re $100 better off each year. Few low-risk investments can be counted on to produce that sort of return, so paying down debt is probably the way to go. Benjamin Franklin was on to something when he said: “A penny saved is a penny earned.”
-Conrad de Aenlle



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