Generally, the answer is reduce debt. This may not always be the best strategy. Why? Sometime you have to buy a bargain when the opportunity presents itself. Being too linear can result in losing some opportunity, so you have to weigh which option is best for you, lets get into some examples, some things I am thinking about now:

Right now I have debt at about 3.8%, I am trying to pay this debt down as aggressively as I can, but I am seriously thinking of holding off for some time and investing a small amount in an income producing fund - why? Because I am thinking that seeding an income producing fund (approx. 10% annual income) that will reinvest into itself will provide a basis for income in a decade or so. If I seed that now, ten years of income will steadily be reinvested, literally doubling the income stream from that investment when I may need it.

If I pay down debt as aggressively as I have, I will lose some of the income reinvestment period, but I will have greater cash flow. The question is which is the smartest approach?

If I break this down, piece by piece, this is what I get:

Cost of debt 3.8% or $38.00 per thousand a year. In order to pay down debt I would be using after tax dollars. If I have $20,000 in debt, then I am paying $760.00 a year to service that debt.

If I divert money from paying that debt down, I continue to accumulate interest charges over a longer period of time. If I extend my payment schedule by two years, even while the principle diminishes, I may add a few thousand dollars to my borrowing costs - more if interest rates go up.

Alternately, if I took significant dollars, lets say $5,000 and invest it in an income producing vehicle that paid 10%, I would make $500.00 per year. That could be reinvested yearly to produce more income.

I think this exercise has helped me come to my conclusion - at this point I think I will continue to pay down debt... as through investing I will not gain what I would owe in interest per year. I will wait until the interest charges are significantly less than potential income earned ... then invest. Net, I want to make money, not make less than I owe.