Choose the No-Brainer Investment Right Under Your Nose

Pop quiz: You're presented with the following investment opportunities. Which would you choose?

1. An investment that has historically returned 10% on an average annual basis. However, some years it won't earn a penny, and you may even lose money before it realizes its full potential several decades from now.
2. An investment where your money will earn anywhere from zero-point-something percent to around 1.5%, and where your principal (the amount of money you put into it) will always be safe.
3. An investment that guarantees an instant 14% return on every dollar you invest.

No-brainer, right?

You'd think so, yet more times than not, smart people completely dismiss the chance to earn an instant 14% (or more!) return on their investment when presented these exact investment opportunities. Why? Because they're just following instructions -- in particular, the standard "pay yourself first" rule of thumb.

Why "Pay Yourself First" Isn't Always the Best Policy

For eons, we've had it hammered into our heads that we should pay ourselves first -- meaning, before settling up with anyone else, we should sock away money for a rainy day or retirement.

So, when faced with decision of where to direct our hard-earned money, it's easy to overlook the obvious course of action (option 3 in the example above) because it doesn't quite jibe with what we've been told all these years.

Here, see what I mean:

1. The first investment opportunity in our example is essentially the stock market (an investment available via your 401(k), IRA, or other retirement account). We all know it's imperative to save for the future. And what better way to pay yourself first, right?
2. The second is the typical return you'll get at your bank (via a checking or savings account). And we all need some safety net to cover unexpected expenses. It's simply prudent.
3. The last – the "no-brainer" investment – is the kind of return you'll get when you pay down revolving credit card debt.

Put that way, would you still pick the one with clearly the best return-on-investment? Or would you first try to build an emergency fund or max out your retirement accounts?  

Becoming Debt-Free Is an Investment

Time after time, people choose to let high-interest credit card debt linger because they don't think of paying it off as an "investment." But logically and mathematically, paying your credit cards off makes the most sense.

Even though socking away money in a retirement account and amassing a cash cushion are financial must-dos, in almost every scenario, there is no better use for your first freed-up dollars than paying off high-priced debt -- which, for most, means revolving credit card debt.

One final note: The right savings hierarchy on paper isn't always the best strategy in real life. Paying off debt needn't be an all-or-nothing choice. For example, if your employer matches a portion of your contributions to your 401(k), you might consider contributing to your retirement plan (with pre-tax dollars, no less) to get the match, and then direct any remaining dollars toward paying off your debt. Same goes with building a cash cushion, particularly if your family may face tough times ahead.

The point is, every dollar you encounter has investment potential . Your goal is to direct those dollars to whatever investment will bring you the biggest return for the least amount of risk.

Fool.com writer Dayana Yochim subconsciously calculates the ROI for every dollar that leaves her wallet.