Insurance & Financial

Should I pay off debt or invest?

Calculate whether paying off debt faster or investing your extra money will build more wealth based on interest rates and returns.

By ShouldICalc Team

Updated January 2025 · See our methodology

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Annual Savings

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5-Year Savings

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Break Even

— months

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Trade-offs to Consider

Every decision has pros and cons. Here's what to weigh:

Money

High-interest debt (>7%): Pay it off first—guaranteed return beats market risk. Low-interest debt (<4%): Investing likely wins. The middle zone (4-7%) is the real debate.
Time

Debt payoff is faster gratification. Investing compounds over decades. Psychology matters—debt-free feeling vs watching investments grow.
Quality

Debt-free life has psychological benefits—freedom, flexibility, peace of mind. But dying debt-free with no investments isn't the goal either.
Convenience

Debt payoff is simple—send extra to the balance. Investing requires choosing funds, accounts, and tolerating volatility.

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Frequently Asked Questions

At what interest rate should I pay off debt instead of investing?

The breakpoint is around 6-7% (roughly market average returns). Above 7%: Pay off debt—it's a guaranteed return. Below 4%: Investing likely wins. Between 4-7%: Consider your risk tolerance and psychology. Always capture employer 401(k) match first regardless.

Should I pay off my mortgage early or invest?

With mortgage rates of 3-7%, investing historically wins. A 6% mortgage vs 10% stock returns = 4% annual advantage for investing. But paying off a mortgage early provides guaranteed return and psychological freedom. Some split the difference—extra mortgage payments AND investing.

What about credit card debt?

At 15-25% interest, credit card debt is a financial emergency. No investment reliably returns 20%+. Pay off credit cards aggressively before investing anything beyond employer match. The math is clear: 20% guaranteed return (debt payoff) beats uncertain 10% (investing).

Should I empty my savings to pay off debt?

No—keep a small emergency fund ($1,000-2,000 minimum) even while paying debt. Without emergency savings, any unexpected expense goes back on credit cards. The cycle continues. Build small cushion first, then attack debt aggressively.

Pay Off Debt or Invest: The Complete Guide

This is one of the most common financial dilemmas. The answer depends on math, but also on psychology. Here’s how to make the right decision for your situation.

The Basic Framework

The simple rule:

Debt Interest Rate	Recommendation
0-4%	Invest (minimum payments on debt)
4-7%	Either/both (personal preference)
7%+	Pay off debt first
15%+	Pay off debt AGGRESSIVELY

Why this framework works:

Stock market historically returns ~7-10% annually
Paying off 8% debt = guaranteed 8% return
Guaranteed 8% beats uncertain 10%
Risk-adjusted, debt payoff often wins above 6-7%

The Math in Detail

Scenario: $25,000 debt at 7%, $500/month extra

Option A: Pay off debt first

Debt payoff time: 4.5 years
Interest saved: ~$4,500
Then invest $500/month for 5.5 years
Investment value (10 year total): ~$38,000

Option B: Invest while making minimum payments

Debt payoff time: 8+ years (minimum payments)
Interest paid: ~$9,000
Invest $500/month from day 1
Investment value (10 years): ~$87,000
Net after debt interest: ~$78,000

Option C: Split 50/50

Extra to debt: $250/month
Invest: $250/month
Debt payoff: 6 years
10-year investment value: ~$55,000
Net: ~$50,000

In this example, Option B (invest) wins on pure math. But the 7% rate is right at the breakpoint—psychology matters here.

The Breakpoint Calculation

Your personal breakpoint:

If Debt Rate > Expected Investment Return (risk-adjusted) → Pay debt
If Debt Rate < Expected Investment Return (risk-adjusted) → Invest

Risk-adjusting investment returns:

Asset Class	Historical Return	Risk-Adjusted (conservative)
S&P 500	10%	6-7%
Total Stock Market	9%	6-7%
60/40 Portfolio	7%	5-6%
Bonds	4%	3-4%

Using conservative estimates, the breakpoint is around 5-7%.

The Guaranteed Return Argument

Paying off debt is a guaranteed return:

Pay off 8% debt = Guaranteed 8% return
Stock market = Uncertain 10% (could be -20% in a bad year)
Risk-adjusted, guaranteed wins

This matters because:

Market returns are volatile
Debt payoff return is locked in
No sleepless nights watching debt shrink

Counter-argument: Long-term investors can ride out volatility. Over 20+ years, stocks almost always outperform. If you’re young with time horizon, the math favors investing.

The Employer Match Exception

ALWAYS capture employer 401(k) match first.

Example:

Employer matches 50% up to 6% of salary
$60,000 salary × 6% = $3,600/year contribution
Employer adds $1,800 = 50% immediate return

No debt payoff beats 50-100% immediate return. This is free money.

Order of operations:

401(k) up to employer match (always)
High-interest debt (>7%)
Split between moderate debt (4-7%) and investing
Invest more as low-interest debt (<4%) takes back seat

Debt-Specific Guidance

Credit Cards (15-25%):

Pay off aggressively
No investment beats 20% guaranteed
This is a financial emergency
Consider balance transfer to lower rate while paying off

Auto Loans (5-10%):

Pay off if >7%
Invest if <5%
Middle ground: personal preference
Don’t extend car loans to invest—payoff frees up cash flow

Student Loans (4-8%):

Federal loans: Check income-driven repayment, forgiveness options
Private loans >7%: Pay off
Under 5%: Invest
Factor in tax deduction (lowers effective rate)

Mortgage (3-7%):

Usually invest (rate is low, timeline is long)
Tax deduction may lower effective rate further
But mortgage payoff has psychological benefits
Consider: extra payments AND investing (split)

Personal Loans (8-15%):

Pay off first
High rates make debt payoff clear winner

The Psychology Factor

Debt payoff benefits:

Immediate progress visible
Emotional freedom
Simplified finances
Sleep better at night
Freed-up cash flow when done

Investing benefits:

Watching wealth grow
Long-term compound growth
Building retirement security
Dollar-cost averaging through cycles

Know yourself:

Debt stresses you out? Pay it off even if math favors investing
Motivated by growing investments? The math supports you
Need wins to stay motivated? Debt payoff provides quick wins

The Hybrid Approach

Why choose? Do both.

$500/month extra available:

$300 to high-interest debt
$200 to Roth IRA

Benefits of splitting:

Progress on both fronts
Some guaranteed return (debt payoff)
Some growth potential (investing)
Psychologically satisfying
Captures time in market

Adjust ratio based on:

Debt interest rate
Your risk tolerance
Emotional weight of debt

The Emergency Fund Question

Don’t sacrifice emergency fund for debt payoff.

Order:

Minimum $1,000 emergency fund
Capture employer match
Pay minimum on all debts
Build 1-month expenses in emergency fund
Attack high-interest debt
Build 3-6 month emergency fund
Invest / pay moderate-interest debt

Why this order: Without emergency savings, unexpected expenses go on credit cards → debt grows → cycle continues.

What About Tax Advantages?

Consider tax-advantaged accounts:

Account	Tax Benefit	Effective Boost
401(k) with match	Match + tax deduction	50-100%+ return
Roth IRA	Tax-free growth	1-2% effective boost
HSA	Triple tax advantage	1-3% effective boost
Traditional IRA	Tax deduction	0.5-1% effective boost

Tax advantages can tip the scales toward investing even with moderate debt.

Making Your Decision

Pay off debt first if:

☑️ Interest rate is above 7%
☑️ Debt causes significant stress
☑️ You need quick wins to stay motivated
☑️ Your investment timeline is short
☑️ You’re risk-averse

Invest first if:

☑️ Debt interest rate is below 5%
☑️ You have employer match available
☑️ Your investment timeline is 15+ years
☑️ You’re comfortable with market volatility
☑️ Tax advantages are significant

Do both if:

☑️ Debt rate is 5-7% (the gray zone)
☑️ You want diversified progress
☑️ Psychology and math disagree
☑️ You can’t decide

The Action Plan

Step 1: List all debts with interest rates

Debt	Balance	Rate	Minimum
Card 1	$5,000	22%	$100
Car	$15,000	6%	$300
Student	$30,000	5%	$200

Step 2: Allocate extra money

401(k) to match: $__/month
High-interest debt (>7%): $__/month
Moderate debt or investing: $__/month
Low-interest debt (min payments): $__/month

Step 3: Execute and review quarterly

The Bottom Line

The “right” answer depends on rates, timeline, and psychology.

Simple rule of thumb:

Above 7% debt: Pay it off (guaranteed high return)
Below 5% debt: Invest (expected higher return)
5-7% debt: Either or both (your preference wins)
Always: Capture employer match first

Don’t let analysis paralysis stop you. Both debt payoff and investing build wealth. The worst choice is doing nothing.

Start today, whichever path you choose.

About This Calculator

Investment return assumptions use historical averages; actual returns vary and are not guaranteed. Interest rate breakpoints are guidelines, not absolute rules. Tax implications vary by individual situation. Consider consulting a fee-only financial advisor for personalized guidance. Last updated January 2025.