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Cash management may sometimes require balancing act

The ability to manage cash wisely is important for everyone’s financial health.

The general tips are well known: spend judiciously, save as much as you can and invest wisely.

It sounds simple enough, but in real life people face balancing acts. Most don’t have unlimited resources, so the question can come down to whether it is smarter to pay down debt or save and invest. Ideally, everyone should be doing both, but the choices may not always seem clear.

If you’re faced with critical cash management decisions, it may help to have a plan. Try listing your priorities in life. Jot down your existing savings and debts and begin creating a plan that can help you visualize a way through to a better financial future.

If your credit card debt alone looks anything like that of the average American household—it stood at $10,679 at the end of 2008—it may seem a daunting task.

Excluding mortgages, the average American is $16,635 in debt.

Weighing the details

Carrying that kind of debt works against anyone’s long-term financial health, but living without enough savings to carry you through three to six months’ expenses—or more, given these uncertain economic times—can be even more of a disadvantage.

If you’re carrying the average household’s $10,679 credit card debt at an annual rate of 18 percent, it may take you a very long time to pay it off. At the rate of $200 a month, for example, you’ll eventually clear the debt, but it will take nine years and cost you more than $21,000 to do so. Paying it off more quickly could save you substantial cash.

But doing that may be a wise choice only if you already have a cash reserve to fall back on should an emergency occur. Otherwise, you could find yourself having to dig deeper into a credit hole. In some cases, the wiser choice may be to build up savings, even as you pay down the debt.

Pay off the mortgage or invest?

How do you choose between prepaying your mortgage and investing your extra cash?

It’s not always a straightforward question of finance, although you should certainly run the numbers.

If you have a 30-year, $300,000 mortgage at 6.25 percent with 20 years left, paying an extra $400 a month on principal could save you approximately $62,000 and cut the time to payoff by nearly six years.

But what if you invested that money, instead?

In 14 years, at an annual return of 7 percent, you could accumulate well over $100,000. Of course, any investment involves risk, and if your goal is to outstrip your calculated mortgage savings, you may find yourself choosing an investment with substantial risk.

What is clear is that if you choose to pay off the mortgage, you can determine your savings because the numbers are known. Investment results are not certainties.

For someone uncomfortable with debt, prepaying the mortgage may be the obvious choice. But an investor with the financial discipline to invest the extra cash may choose otherwise. Don’t forget to factor in each option’s effect on your taxes.

Can’t decide?

Consider the middle ground. Put half toward prepaying your mortgage, half into investments. Even small adjustments can help.