Pay Off Debt or Invest? A Simple Way to Decide

Compare your debt interest rate with realistic after-tax investment returns to decide where extra money should go first.

With $500 spare each month, should it go to a loan or to investments? The answer comes down to comparing two rates.

The rule of thumb

Paying a debt gives a guaranteed return equal to its interest rate. Investing gives an uncertain return. If your debt costs 20% (a typical credit card), paying it off almost always wins. If it costs 3%, investing usually wins.

The middle zone

Between roughly 5% and 8% it is close. In the calculator's example, a 7% debt against a 6.1% after-tax investment return leaves the debt-first plan ahead by only a few hundred dollars. Then personal comfort matters: many people value being debt free.

Do not skip the safety net or the match

Keep a small emergency fund first, and take any employer 401(k) match, since that is an instant return.

Run your numbers

Use the pay off debt or invest calculator. For high-interest cards, see the credit card payoff calculator or the debt payoff planner.

This article is general education, not financial advice.