Making Over Janet

July 2 -- Janet's savings [which she hopes to use for a condo] exceed her debt, and she suspects she's paying high interest rates on her loans while trying to decide what to do next. Fear of making the wrong step is paralyzing her, and she ends up doing nothing.

Most people think of debt and investments as distinct parts of their finances. They develop separate plans for each, seldom seeing them as alternatives along a single continuum. But whether you already have debt or are considering taking on new obligations, you should consider debt as another investment tool for your dollar.

Each dollar you have for investment (after you've paid your taxes and living expenses) should be put to work to your greatest advantage. You have choices: you can pay down outstanding debt, put the money into a savings account or invest in stocks or bonds.

To decide which is most advantageous, compare the expected rates of return, and the likelihood of realizing that return.

Crunch the Numbers

For debt, this is easily determined, because the expected rate of return is the interest rate, which is usually clearly stated. Payment of the interest is contractually required.

For example, if you have credit card debt at 18 percent interest, paying that down is equivalent to earning an 18 percent rate of return (with full expectation of earning that rate). Don't look to any savings accounts to achieve that kind of return.

Some debt is tax-deductible (home mortgages, home equity loans; some student loans). Savings accounts, corporate bonds and equity investments are also typically subject to tax. In order to do a proper evaluation, you have to compare apples to apples — when evaluating options for your money, make sure you adjust the various opportunities so that you're comparing after-tax rates of return.

What Janet Should Do

Since Janet is in New York, let's assume she is subject to 28 percent federal and 7 percent state and local taxes. Credit card debt is not tax-deductible, so her after-tax rate is the same as pre-tax (assuming 18 percent pre-tax, it's also 18 percent after-tax).