The extra money might be a problem for those who have it. Is it better to utilize the funds to pay off the debt they've amassed, or at least to reduce it considerably, or is it better to invest the funds in ways that will provide returns in the future? It's possible to construct a case for either option.

Should You Pay Off Debt or Invest Your Money?

Paying off debt and putting money into investments go hand in hand. "Aim to habitually contribute to three buckets"—debt reduction, pension, and an emergency fund—according to Linda Davis Taylor, a financial expert.

There's no reason not to do it, even if you can contribute $10 or $20 per month to retirement or savings. The director of education at the charity Cambridge Credit Counseling in Agawam, Massachusetts, concurred, Martin Lynch said.

Investing: The Case

It is a good rule of thumb that if you can earn a higher interest rate on your investments than you are paying on your loans, you should invest. There are several ways to save money on your mortgage, such as using an interest-free credit card or investing in an index fund that pays out at least 10 percent a year. But if you owe 20% or more on your credit cards, it's wiser to use your additional funds to pay down the debt rather than invest them in an index fund.

Paying Down Debt Makes Sense

Debt repayment is a better option than investing in the future. The first is that if your loan has a high-interest rate, you may be able to save money. This is especially true if you owe money on your credit cards.

It's hard to find investments that yield as much as this one. If you plan on borrowing money in the future, such as for a mortgage or a vehicle loan, your credit score is an important statistic to keep an eye on. Even if you can secure a loan, a low credit score might result in higher interest rates.

Using Both Arguments

Investing vs. paying off debt does not have to be an either/or choice. You have the option to do both, and you should. Some of your money might be used to form an emergency fund, while the remainder could be put toward paying off debts. A money market mutual fund, for example, is a low-risk and extremely liquid investing option for your emergency fund.

Taxation Issues

A "Saver's Credit" on your tax return of up to 50% of your qualified contributions to a Roth or regular IRA, a 401(k), or any other retirement plans, depending on your income, may be available to you in addition to other tax benefits.

In certain retirement plans, such as a 401(k), you don't have to pay taxes on your contributions or investment gains until you receive your money in retirement, which can be decades away.

How to Pay Off Your Debts

Paying off debt might be a daunting task if you don't know what to do with all of your extra income. The solution is straightforward if you have enough money to cover what you owe. But if you don't have a lot of money to spare, you'll have to make some sacrifices.

When getting out of debt, starting with the highest interest rate debt first and working down is the best strategy. For example, if you have two credit card accounts, one with a 20% interest rate and the other with a 15% interest rate, focus on the 20% debt first.

For Those in Serious Debt

If your extra cash isn't making a difference in your debt, you may have to take more serious steps to get things back on track. In the first place, contact your lender if you're having difficulty paying even the bare-bones monthly payments on your credit cards or other debts.

It may be able to lower your debt's interest rate or minimum payment. Alternatively, you might employ the services of a respected debt-relief firm to conduct the talks. Ensure you know who you're working with within this location because frauds are common here.

Handling an Extra Income

It would be best if you initially put ten months' worth of spending into an emergency fund if you get an unexpected windfall, such as a windfall from an inheritance or a bonus at work. Others recommend dividing your yearly income by $10,000 and storing up that many months' worth of spending in savings account for emergencies. Six months' worth of costs can be saved by making $60,000 a year.

The Verdict

It's always nice to have a little extra cash on hand. Only you can decide whether to invest that money or pay off your obligations. But it's better to use it than to throw it away. You'll be in a better financial position regardless of your chosen path.