Ditch High-Interest Debt First

Paying off debt isn't as exciting as investing in stocks, but more often than not the returns beat the market. With credit card interest rates sometimes running 20 percent or more, don't even think about investing until you've paid off your credit card balances. Investments that guarantee a 20 percent return don't exist, but eliminating credit card debt is like earning the interest rate that your credit card charges.

Whether you make the minimum credit card payment from laziness or because it's all you can afford, the following techniques reduce your debt with a minimal amount of pain:

1. For light debt loads, get back on track by hiding your credit card in a drawer for a while. Paying cash or writing checks usually brings your spending back to reality. To remove the temptation of credit card debt, replace your credit card with a debit card, which you must pay off each month.

2. As long as you have some emergency funds to fall back on, don't contribute to savings until your high-interest debt is paid off. In addition, consider using additional savings to pay down high-interest-rate debt. The few dollars you lose in savings interest saves you a bundle of credit card interest.

3. If you can't afford to pay off your credit card balances, start by paying off the debts with the highest interest rate first. For example, pay as much as you can afford each month on the card charging 20 percent interest, while paying the minimum monthly payment on your 8 percent credit card. When the balance on the 20 percent card is paid down, switch the monthly payment you were making to the 8 percent card. When that card is completely paid up, apply the monthly payment to your 4 percent home equity loan. (After your debts are paid, you can switch the monthly payment to savings or investing.)

4. As a last resort, stop contributing to your 401(k). Reducing the taxes you pay on your income, receiving employer-matching, and earning an investment return might be better than saving on credit card interest. By the way, don't start investing in other accounts until you max out the company matching in your 401(k). Company matching is like receiving a 100 percent return on your money. You don't think you can afford to withhold that much of your paycheck? You can't afford not to.

5. If you're in serious trouble with debt, don't try investing to dig your way out. Instead, contact Debt Counselors of America, a not-for-profit organization that works with creditors to reduce your monthly payments, late fees, and interest. You make one monthly payment to DCA and they handle payments to your creditors for a small fee.