Pay off debt or invest? How to decide
You have spare cash each month. Paying down debt earns a guaranteed return equal to the interest rate; investing might earn more but isn’t guaranteed. The rate on the debt usually settles it.
| Pay off debt | Invest | |
|---|---|---|
| Return | Guaranteed = debt’s APR | Expected ~7–10%, variable |
| Risk | None | Market risk |
| Best against | High-interest debt (cards) | Low-interest debt (cheap mortgage) |
| Bonus | Frees cash flow, peace of mind | Employer match, compounding, tax breaks |
Compare the rates
Paying off a 22% credit card is a guaranteed 22% return — almost nothing beats that, so crush high-interest debt first. A 3–4% mortgage is below likely long-run market returns, so investing the difference often wins.
Do both, in order
- Capture any employer 401(k) match — an instant, near-100% return.
- Build a small starter emergency fund.
- Attack high-interest debt (cards, payday loans).
- Then split between investing and lower-interest debt by preference.
The verdict
Kill high-interest debt (cards) before investing — its guaranteed return is unbeatable. For low-interest debt like a cheap mortgage, investing the difference usually wins, especially with an employer match. Compare your debt’s rate to expected returns in the Debt Payoff and Compound Interest calculators.
Frequently asked questions
- Should I pay off my mortgage or invest?
- If your mortgage rate is well below expected market returns, investing usually wins long-term. Paying it down is a guaranteed but lower return, with real peace-of-mind value.
- What counts as “high interest”?
- There’s no hard line, but double-digit rates (credit cards, payday loans) almost always beat investing. Sub-5% debt is where investing tends to win.
- Should I invest before having an emergency fund?
- Build a small starter emergency fund first, so a surprise expense doesn’t force you back into high-interest debt.
Settle it with your numbers
Free, in-browser calculators for everything above.