Should I pay off debt or invest?
Pay off debt above 7% interest first (credit cards, high-rate loans). Invest if debt is below 5% (most mortgages, federal student loans). For debt in the 5–7% zone, it's a toss-up — mathematically invest, but paying debt has guaranteed returns and psychological benefits.
Formula
If debt rate > expected investment return (7%) → pay debt. If debt rate < investment return → invest. Always get employer match first.
Example
Credit card at 22% → pay immediately. Student loan at 5.5% → minimum payments + invest the rest. Mortgage at 3.5% → never pay extra, invest everything above minimum.
How it works in detail
The math is simple: if your debt charges 8% and investments average 7%, pay the debt (guaranteed 8% return). But it's not purely mathematical. Factors: (1) Employer 401k match always comes first — it's 50–100% instant return, (2) High-interest debt (>7%) should be aggressively paid, (3) Low-interest debt (<4%) is cheap — invest instead, (4) Tax deductions matter: mortgage interest and student loan interest deductions lower the effective rate, (5) Psychology matters: Dave Ramsey's 'debt snowball' works because motivation matters. The optimal path usually: get full 401k match → pay off high-interest debt → build emergency fund → max Roth IRA → pay off medium debt OR invest in brokerage.
Model the impact of debt payoff vs. investing on your net worth
Open Free Calculator →Related Questions
What savings rate do I need to retire early?
At a 50% savings rate, you can retire in roughly 17 years. At 65%, about 10 years. At 75%, about 7 years. The relationship is logarithmic — your savings rate matters far more than your income or investment returns for determining time to financial independence.
How much should I contribute to my 401(k)?
At minimum, contribute enough to get your full employer match (free money — typically 3–6% of salary). Ideally, contribute 15–20% of gross income to retirement accounts total (401k + IRA). The 2024 401(k) limit is $23,500 ($31,000 if you're 50+).
Plan your financial future
Pick your decision. Tap through a few screens. Get a confident answer in under 60 seconds.
Model My Decision