I'm working on identifying my financial goals for next year, and I'm having trouble finding a balancing act between paying down debt vs. increasing my goal amounts for savings and investing. I've identified $20k worth of savings goals, split between my retirement account, my personal investments and my savings. My challenge is deciding what I want to do with any additional money throughout the year.

On the one hand, my student loans have been a nagging monkey on my back for some time now. I have 3 left: $6k @ 6.7%, and 2 more totaling $9k @ 3.75%. They're not a hardship on my budget (only $200/month), but they're old (the lower interest rate ones are from my undergrad back in 1999 and the other is from grad school in 2009). They're starting to annoy me the way relatives who overstay their welcome as guest in your house, if you KWIM. I can't wait to have them gone.

On the other hand, I'm getting closer to the halfway point between the start of my career and the end of it, so I'm becoming increasingly aware of the time I have left to take advantage of the miracle of compounded interest. While I've diligently invested in my retirement account since my mid-20s, I've only in the last year or so started figuring the stock market out and investing extra money on my own. So I feel I'm a bit behind the power curve here.

I'd love to hear how folks here balance paying down your debt vs. increasing savings and investments. Which do you prioritize and why?

While we could all tell YOU what WE would do, we all have a different opinion. The quantitative analysis is that you should calculate your average return. Then, use that as a discount rate to decide what to do with capital.

The qualitative side is, how are you sleeping? If it bothers you, is it worth a marginal x%? I'd say no. When I was young, it bothered me very much. So, despite having interest free loans, I still paid them off within a couple years of graduation. I literally laid in bed at night and calculated how much time I had left if I paid $x the next day.

I personally think, you definitely CANNOT go wrong paying off debt.

I personally just dealt with this same issue. I am an investment advisor so I like to assume I have an above normal understanding with regards to the investment markets. So typically unless the interest rate is over 10% per year I wasn't all that interested but just recently I had a change in my personal life when I found out my wife was pregnant with twins. So actually (just today to be honest) I went ahead and paid off the rest of my car loan and my wife's college loans even though the interest rates were both around 4.5%. I personally just wanted to slim my budget down as much as possible before the babies were born.

I agree with Bichon, the personal side of things has to come into the calculation beyond just the numbers.

Michael Goldberg
Goldberg Financial, LLC
You can follow my blog here: http://financeinlife.blogspot.com/2012/ ... ot-of.html

Thank you both for your thoughts. I think the reason why I've been struggling with this question is because I know how the math works out, but I'm still bothered by carrying around the student loans. I suppose, though, that sometimes the math is irrelevant when compared to sleeping better at night.

I had the same decision to make. Here were my priorities:
1) Get minimum matching on 401k
2) Fund Roth
3) Pay off debt (my mortgage was my only debt)

I finally completed goal 3 toward the end of last year. Goals 1 and 2 renew yearly, though I try to complete 2 in January (by saving up near the end of the previous year).

Anyway, now I've got plenty of money that I can use for saving/investing/speculating or just buying those nice but unnecessary things I didn't buy before without feeling guilty. Basically, what paying off debt gives you is freedom. If you take on (or keep) debt to invest in the market, you're setting yourself up with fixed expenses but uncertain income. Sometimes you can get lucky but if you value freedom and peace of mind, pay off debts.

Edit: I forgot to add, that my new goal 1 is putting in the maximum tax deductible amount allowed by law into the 401k. For what it's worth, this is easily achievable with a good job and no house payment.