Should I Pay Off Debt or Invest?
Paying off debt earns a guaranteed return equal to the debt's APR, because every dollar of principal you remove stops costing that rate. Investing earns an expected return that is not guaranteed and, outside retirement accounts, is taxed. So the rule is simple: pay debt first when its APR is above your expected after-tax return, invest first when it is clearly below, and split the difference when they are close.
This calculator projects both paths for a monthly amount over a number of years: the interest avoided by paying debt versus the after-tax growth from investing. It shows the break-even return, the pre-tax return investing would need to match the debt. Card debt at 20% or more always loses to the market; a 3% mortgage almost always wins.
Results
Over 10 years with $300 a month
A toss-up
Paying the 7% debt is a guaranteed 7% return. Investing at 8% is worth 6.8% after tax. The difference after 10 years is $568 in favor of paying debt.
You need a pre-tax return above 8.24% for investing to beat paying down 7% debt once a 15% tax on gains is counted.
Capture any employer 401(k) match first, and keep at least one month of expenses in cash before either.
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Frequently asked questions
Should I pay off debt or invest first?
Compare the debt's APR with your expected return after tax. High-rate debt, roughly anything above 8%, is worth paying first because no investment reliably beats it. Low-rate debt, under 4% or 5%, is usually worth keeping while you invest. In the middle, the guaranteed return of paying debt often wins on peace of mind.
What return should I assume for investing?
Long-run U.S. stock returns have averaged around 10% before inflation and 7% after, with large swings year to year. A diversified portfolio with bonds is lower. Use 7% to 8% for a stock-heavy account, less for a conservative one, and remember it is an average; individual decades have been much worse.
How do taxes change the comparison?
In a taxable account, gains are taxed at capital gains or income rates, which cuts an 8% return to about 6.8% at a 15% rate. In a 401(k) or IRA there is no drag, so the full return counts. The calculator applies your tax rate unless you select a tax-advantaged account.
What about an employer 401(k) match?
Always take the match first, before any extra debt payment. A 50% match is an instant 50% return, and a 100% match doubles your money on day one; no debt rate comes close. After the match, apply the APR-versus-return rule to the rest of your money.
Is it ever wrong to pay off debt first?
Only when the debt is cheap and you have no other savings. Paying off a 3% loan while holding no emergency fund and skipping a retirement match costs you real money and leaves you exposed to the next surprise expense. Keep a cash buffer, capture the match, then attack debt in rate order.