That’s one of the most frequently asked questions that I get from clients, and the answer isn’t always obvious and it’s rarely purely financial. In pure math terms, if the interest rate you are paying on your loans is higher than what you expect to earn on your investments on an after-tax basis, then the simple answer is to pay off debt. But what about feeling like you’re never getting ahead?  This is where a few rules of thumb will help you decide what to do.

1. Set a Date to Be Debt-Free: If you have any debt at all (loans, mortgage, credit cards), make sure you have a concrete debt repayment plan in place.  This means setting a date to be debt-free and allocating an amount each month to repaying debt.

2. Pay off High Interest Debt first: If you are paying more than 10% interest on your debt and it’s non-deductible debt, then you’re almost always better off paying off the debt than saving or investing.  Even in better investment times, it’s almost impossible to get an investment that will pay you 10% after-tax consistently.  Once the high interest debt is paid off, then you can start saving.

3. Know thyself: Are you the type of person who always has a little bit owing on credit cards or a line of credit, no matter how hard you try to pay it off completely?  If that sounds like you, you’re better off to put some money in savings using an automatic monthly savings plan even if you pay more in loan interest than you earn in your savings account.  Otherwise your low grade debt habit might cause you to put off saving forever.

4. Balance your goals: If you have important short or long term goals, then balancing debt repayment with saving for your other goals can makes sense.  If you put off your life completely for the sake of debt repayment, you might resist your plan and bust out and splurge – which will only make you feel guilty and no further ahead financially.

The best answer for whether to pay down debt or to invest comes from an honest assessment of your relationship to debt and what will motivate and energize you to stick with your financial plan.

If you’re tired of being a slave to debt and want a fast track to freedom, check out Sheila’s Debt-Free Challenge. Classes start in Vancouver February 10th.

Sheila Walkington is co-founder of the Women’s Financial Learning Centre

I just finished reading Margaret Atwood’s new book Payback, a sobering look at our relationship with debt -— past, present and future.  While many of the literary and historical references were over my head, her point that our relationship to debt comes with serious emotional baggage and that there is a day of reckoning seemed very apropos to the times we are in.

In today’s financial literature, a distinction is often made between “good debt” and “bad debt,” and although my preference is for no debt, this is a good time for us all to consider our own feelings about debt and our “payback” strategies.

Good debt is the debt you incur to purchase an asset, like a house or investments.  And ideally these are appreciating assets over the long run.  So while a car loan has an asset attached to it, it is depreciating, so something to be cautious about.

Bad debt is the debt that comes from buying “stuff” and living beyond your means.  If you are running a balance on your line of credit or your credit card that originated from purchases that you didn’t have the money for, then it’s time to take a close look at your cash flow and to make more money or to reign in your spending.

“Ugly debt” can be either good or bad debt spinning out of control.  If you aren’t sure how much debt you have, if you have balances on multiples credit cards, or if you are using your line of credit to pay off your credit card or your mortgage then take a deep breath, get honest with yourself, sharpen your pencil and make a payback plan before it’s too late. — Karin Mizgala

Karin Mizgala is a Vancouver-based fee-for-service financial planner with an MBA and a degree in psychology. She’s the co-founder of the Women’s Financial Learning Centre.