It seems that some readers may have come away with the notion yesterday that when I said “debt” that I meant credit card debt.

I’ve never carried a balance on a credit card in the 18 years I’ve been using them. And of course I use them all the time in lieu of cash and for paying bills online so that I can earn points/miles, participate in the purchase protection programs, have an electronic copy of my spending habits, etc.

No, the debt I was talking about was housing, cars, and student loans.

The main point that inspired the post, the one that I completely failed to make, was the fact that the “paying off debt vs. doing something else” calculation changes completely based on whether that “something else” is investing or saving. At least in my mind. Investing is about return. Saving is about safety.

Extra credit question: Which maximizes your NPV? Putting $10,000 into a 4.5% CD or paying $10,000 toward your student loans (4.25% interest rate) or paying $10,000 toward your mortgage (6% interest rate)?

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I’m often torn between the idea of paying off a little more debt or doing something else with the money.

For instance, I just sent my lender an extra car payment so that I could pay down the principle a bit faster. Paying an extra payment now is equivalent to reducing my number of payments by 1.3 payments. It would be really nice to pay off all these car and student loans so that I feel like I have more options and more freedom.

A month ago, I socked away a grand in a CD that earns 5% a year, since it seemed like an amazing interest rate. However, if you compare this rate with that of the car loan, I’d earn a better “return” by using the money toward the car loan.

Then there’s the idea of saving money for a disaster. If I lose my job, how many months could we last without that paycheck? Not many.

Better start saving more.

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