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Pay off High-Interest Debt

Kimberly Lankford

My husband wants to bank the money we made from selling a rental home and watch it grow, but I think we should try to pay off some of our debt. What is your advice on how to use the sale proceeds?



My husband and I have a lot of debt, and we are spending about $1,000 monthly on credit card debt and about $3,100 on housing and car payments. We have just sold a rental home and netted about $30,000. My husband wants to bank it and watch it grow, but I think we should try to pay off some of our debt. What is your advice on how to use the sale proceeds?

Set your priorities based on interest rates, comparing the rate you're paying on the debt to your potential investment returns.

First, invest enough money in your 401(k) to get any employer match, which generally gives you 50% or 100% returns just from the match alone.

Then pay down high-interest credit-card debt. Balances on an 18% card are costing you a lot more than you could ever get from your investments. And add your car loan to the hierarchy based on its interest rate.

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If you have a lot of high-interest debt, though, it's still a good idea to invest some of the money, so you don't get out of the saving habit entirely. "Mathematically, they should be putting all of their money toward paying down the debt," says Stuart Ritter, a certified financial planner with T. Rowe Price. "But from a behavioral standpoint, it's better to do both."

Next, use some cash to build up an emergency fund with at least six months' of living expenses, so you don't land in debt again.

Finally, it's usually better to invest the remaining money rather than rushing to pay off any student loans or your mortgage, which tend to charge lower rates than you'd get from your investments and may be tax-deductible. First max out any tax-advantaged accounts, such as a 401(k) and Roth IRA, then invest in taxable accounts.

For more advice on getting out of debt, see Lower Your Debt Right Now.

Got a question? Ask Kim at askkim@kiplinger.com.



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