Comparing Options

If you are fortunate enough to possess some extra money, whether from a bonus, inheritance or just the little above your living expenses each month, what is the most profitable business for it? How can you best maximize the return on your extra cash with the current interest rate?

The interest rate is an interesting phenomenon. The current prime interest rate determines both the interest you pay on your debt and the interest you gain on your investments. Therefore, each individual must balance this rate within his or her own net budget. Thus, the answers to the introduction questions are not entirely simple. For some, paying down a debt may actually be a better venture than an actual investment. The key is to lay out your own individual situation in a clear mathematical format, providing your household the ability to clearly see the best deal for you.

The first step in this process is to record all the money you owe and the interest rate you currently pay. For example, you might pay 6% on your mortgage interest rate and 12% on your credit card debt interest. On this same paper, go ahead and include the outstanding balances. There is no need to worry about any credit lines that you pay off each month, as this scenario is only concerned with the interest you pay for your current debt load.

The next step is to take a second piece of paper and write out all the current and potential investments available to you. With how volatile the stock market is, let's keep individual stocks out of this situation. Do include your 401K, profit sharing, CD and saving accounts, even considering a few secure mutual funds. Next to each one, write the current interest rates that are paid on each of these. This part of your project will take a little more time. Check the web and make a few phone calls to see what current CD interest rates and savings from credit unions or banks are paying out. Explore your current account assortment and speculate on a variety of ones available for you to open down the road.

Make sure that you have an adequate emergency fund first, then jot down the sum of spare money you have. For simplicity, let's look at a yearly total. So, if it is a lump sum or a monthly amount, estimate what you will have extra for one year. The first element for saving the most money is to pay off any debt where the interest rate is higher than any potential earned investment interest. Once that is done, you will look at each item starting with the highest interest rates, both credit and debt. Continue to expend this money until it pays toward all the highest rates first.

Does this only confuse you? Well let me give you an example. Imagine you have a bonus of $5000. You should always put some aside for something fun, so let's say $1000. That leaves you $4000 to make money with. On your two papers you have a mortgage interest rate of 6% with $100,000 left to go and one credit card debt of $2000 at 12% interest. For your investment page, you have a savings account at 2%, potential CD account at 5% and a 401K that averages about 10% return.

Given this example, you would do the following to maximize the money you earn by balancing your interest rates. Pay off the credit card debt of $2,000 at 12%, which will save you the interest and free up extra money each month on the minimum payment. The rest of the $2,000 should go straight into your 401K. Not only is the interest rate the highest at 10% return, it also carries some additional tax savings.

While this article truly simplifies the process, the important message is investing for the highest return is not as simple as finding the best mutual fund. If you have debt, those interest rates need to be considered as potential investments too. By buying down a loan of 6% as an example, you are generating a 6% return on your money instantly. Along with also opening up room in your budget when you eliminate the monthly payments. Take the time to calculate this interest rate balance in your own financial picture and you will find that your money will take you farther into the future.

Debbie Vasen is a published web content freelance writer. She writes on a variety of subjects including money, parenting and work at home. As an active woman with a strong passion for living frugally, she has energetically researched a variety of money saving techniques. An avid information gatherer with advice to share, she enjoys spending her free time writing. Debbie left a high-powered career in the business world to work at home and be with her kids, a decision that enhanced her need to budget and spend less.

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