1) I can pay it off.

Otherwise I’m throwing liquid assets at a non-liquid debt and I’m not even gaining the monthly payment back into the budget. it helps that I don’t have a high rate on any debt because they are either secured ( home, vehicle ) or student loans.

All my emergency money / savings sits in a high yield account. I used to use rotating CD’s but they can’t beat the convenience of internet savings accounts they have today.

Presumably, if, say, trent had asked someone else this question a couple of years a go then investing in a Roth IRA would have been a great answer, whereas if he asked it now (after the financial armageddon) the great answer would be on the credit card debt.

I think the answer is different for each circumstance. You have to ask:
If I pay off my charge cards, do I have the willpower to not irresponsibly charge them back up again?
Do I have an emergency savings?
If I invest, how liquid is the investment?
What are any tax consequences of my decision?

If it helps, make an Excel (or Open Office)spreadsheet and map out each scenario. What is the future value of my money if I do option A (paying off debt)? What is the future value of my money if I do option B (invest/save)? In most cases, choose the option that is worth the most.

It’s all a matter of what’s going on in someone’s own life — yes, I have debt. Yes, I accrued that debt while overspending, but I wouldn’t call all of it irresponsible. For instance, there was a period of six or so months when I was working in a job where I was promised the opportunity to make “bonuses”, but which turned out to be rather lacking, and I literally did not make enough money every month to pay my bills, get to and from work, and eat. I’ve moved up in the world now, but have debt from my experience.

And in my case, I’d jump on an extra grand to squirrel away or put toward my debts, or, in a very likely case, split it up and do both.

The comment about risk making the investment a better decision, is a little misleading. I don’t think TSD was trying to say that putting the money into investment is the ‘right’ decision, only that if people do not change the underlying reason of why they are spending more then the make than putting the money into debt is in essence ‘wasted’ money.

I totally agree that people should be asking the question of why they have debt, before they go about fixing the debt. The debt will return if the income, emotional, or situation causes are not corrected.

One thing you didn’t take into account is financial security. Investing may give you a better rate of return than paying off your mortgage, student loans, or auto loans. However, most of these low interest loans also come with rather large required monthly payments. If you fall on hard times, skipping your mortgage payment isn’t really much of an option.

Moving from credit cards to the more general topic of invest vs. paying off debt (debt in this context specifically being auto and mortgage), my wife and I had this discussion recently. Her view is one of “I want no debt. Any extra money should go there first.” I support this in principle (I also want no debt), but I take the approach of looking at cost/return based on our marginal tax rate. I also come from a family that had little savings…and have developed a strong bias towards savings. (Fortunately this didn’t require a crisis to modify behavior :-) I showed my wife the numbers (low interest car loan, low interest home loan) vs. what we could expect after taxes from a Vanguard mutual fund. Recognizing that cold logic isn’t always the best relational answer (well understood after 20+ years of marriage to my wife), we split the difference and agreed to put a portion of any extra money towards debt (car initially) and a portion into savings. Like Trent has written above, making this decision solely based on the expected rate of return would have been a mistake – at least for me.

Thanks for a great blog!