BOSTON--While Congress has been wrestling with the idea of whether to step into the fray to attempt a rescue, bailout or prop-up of the nation's financial system, individual investors have been grappling with a personal question:

Where do I invest now?

There is no shortage of advice, from one end of the spectrum -- where the idea is to stay fully invested to take advantage of bargain stock prices -- to the other, which involves being entirely in cash or a combination of cash and hard assets like gold.

There are plenty of ideas that sound good, ranging from tilting towards small-cap stocks -- a recent bright spot in the domestic market -- to heading for "recession-proof" industries such as health care.

But the one thing most experts have failed to suggest is that consumers do precisely what the government has been talking about, namely bailing themselves out of debt.

The average American household has about $9,500 in credit card debt, and plenty more in loans securing cars and houses.

Think of it this way:

In any market conditions, an investor would like to see their net worth rising. Your net worth is defined as "everything you own minus everything you owe."

Lighten the load

As such, you can increase your net worth by investing and growing the value of what you own, or you can reduce the amount of the outstanding bills that are presented against your holdings.

"Interest rates on debt are on the way up, particularly for unsecured debt, which means that you are getting a good return on your money by paying down the debt," says credit expert Gerri Detweiler, author of the new book "Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts."

Not only that, but it gives a big psychological boost. The fewer bills you have to worry about, the less you have to worry about what may happen with the economy.

In short, at a time when debt issues are choking the financial system, consumers looking at the long-term picture and afraid to invest should at least make sure they're not going to choke on their own credit issues.

Rest assured, any approved bailout is going to cost you money and help some institutions get away from bad debts, but it's not likely to help you. Thus, barring foreclosure or bankruptcy, you'll have to get rid of the debt on your own.

That said, no experts are advising liquidating an investment portfolio or stopping retirement-plan contributions in order to pay off the car loan or pay ahead on the mortgage. And an emergency fund -- particularly in these tight and troubled times -- is a must, and should not be zeroed just to pay off debt, because the next emergency expense (and there's always something) will just re-create the problem.

"You can make your financial picture stronger by paying down your debt, but you don't want to sacrifice your liquidity and you don't want to use up your savings if you are just going to create your next debt problem once you have the cards or the loans paid off," says Greg McBride, senior financial analyst for BankRate.com.

"It's okay to serve two masters, to put some money into savings and also pay down debt," he adds, "but if you are going to change things and focus on the debt you need to make sure that you are doing what's necessary to break the cycle of debt. You cannot borrow your way to prosperity, so it's important that you don't give up on saving and then find yourself back in the same hole a few years from now."

Steps to take

The formula that experts generally suggest involves first setting aside emergency funds -- generally in cash, savings or money-market accounts -- to protect against a few bad months.

Then, take advantage of "free money," such as the matching funds in an employer's retirement plan. Even if that money goes into the safest, most-secure option in the plan, it comes up with a good return because the employer's money is a big boost to your contributions.

After that, eliminating debt can be a big focus, and a good money-management practice for nervous consumers who have pulled the plug on some of their investment portfolio and gravitated towards cash.

Say you liquidate a mutual-fund account for $10,000 and pay off debt. Then you start saving the dollars that would otherwise have gone to the monthly payments. That savings grows, and will soon be positioned for reinvestment, with luck at a time when the market is easier to stomach.

"With the average credit-card rate being above 11% and the average auto loan at more than 6%, using your money to pay down debts gives you a return that you're certainly not getting elsewhere in the market right now," McBride says. "But you have to know yourself, and that you're not just spending this money, using it to pay down bills so you can run them right back up again."

"If you can avoid that cycle," he adds, "paying down your debt may be the one sure thing you can do in this market to help your net worth."

Copyright © 2008 MarketWatch, Inc.