30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances

Part III. Find the Best Use of Your Money

At morningstar, we spend most of our time trying to help investors identify the best stocks and mutual funds for their goals.

That's a worthwhile endeavor—no doubt about it. But in talking to more and more people about their money, I've realized their make-or-break financial decisions came well before they began selecting investments. Did they save enough? Did they rack up big debts? Did they short-shrift their retirement plans in exchange for saving for their kids' college educations?

All these decisions boil down to a central question: What's the best allocation of my household's precious financial resources? Should you pay down your outstanding debts, even so-called good debt like your mortgage? Or invest in the market? Are you better off saving in your company retirement plan, an IRA, or a plain old taxable account?

In some cases, the decision is obvious. For example, if you've got high-interest credit card debt, the best use of your money, by far, is to pay it off, because it's outlandish to assume that any investment could possibly generate an annual percentage return to rival what you're paying to service that debt.

In most cases, though, finding the best return on your money is more art than science. For example, say you have a 5 percent mortgage. Can you reasonably expect your investments to return 5 percent a year, thereby making that a better use of your cash than prepaying the home loan? Possibly. The decision rests on several factors, ...