Depending on your situation, it may make sense to pay down debt, start an investment program or do a little of both. A financial professional can help you weigh your options and determine the best strategy.

If you’ve got a little extra money in your bank account — whether because of a tax refund, a raise at work or even a severance package from your former employer — you may be wondering whether you should invest it or use it to reduce debt. The answer depends on a variety of factors which you should consider carefully before deciding.

How much are you paying in interest?

Not all debt is equally costly. Fixed rates are constantly changing. If you’re looking for a home, stay up to date with the latest rates at the Federal Home Loan Mortgage Corporation website. Student loan interest payments are currently on pause, but can run anywhere from 3.73% for federally subsidized loans up to 13% for private loans. Credit cards are one of the costliest forms of debt, with rates on balances running over 16% on average.

Most experts recommend paying off high-cost debts like credit card balances first, before you invest, because very few investments can reliably earn 16% per year. But the benefits of paying off lower cost debt aren’t quite as clear cut, until you consider another factor.

What did you borrow for?

Sometimes you take on debt for good, productive reasons, like increasing your earning power through higher education or buying a rental property that will earn income for you in the future. That’s more like an investment and very different from charging an expensive vacation or restaurant meal on your credit card. Pay off the debts you’ve incurred purely for pleasure first, then worry about the other, more productive ones.

How much can you earn in investment returns?

In general, if you can earn more on your investments than you’re paying out in interest on your loans, you’ll come out ahead by investing. However, it’s tricky because while your interest payments are predictable, your investment returns are not. In 2020, for instance, the S&P 500 returned 18.40%, but it lost 4.38% in 2018. You never know whether your investment returns will exceed interest payments in any given year.

However, your financial professional can help you make more accurate estimates by looking at long-term averages.

Is your interest deductible?

The interest on mortgage loans, and related financing like home equity loans and home equity lines of credit, is often tax deductible. This can reduce the cost of financing and make it more appealing to invest rather than pay off your loan. Interest on most other kinds of financing—like car loans, student loans and credit card balances—is generally not tax deductible. Your tax professional or CPA can help you review the loans you’ve taken out and determine how to prioritize paying them off.

Will your credit rating improve?

Paying off loans can enhance your credit rating, which can reduce the rates you’ll pay on other loans. In addition, a good credit rating can be attractive to potential employers, landlords and other important people.

Why not do both?

If you have enough income to spare, you may be able to pay off debt and begin an investment program. An experienced financial professional or tax professional can help you devise a plan to pare down your highest cost debts, while setting aside funds for the future. If you make small, regular contributions toward both objectives, you can make surprisingly quick progress to a more secure financial future.