Compare two strategies: pay off debt first then invest, vs. invest while servicing debt. See which builds more net wealth over your time horizon.
Total outstanding debt (student loan, car, personal loan)
Annual interest rate on the debt
Total monthly budget — used entirely to pay debt (Strategy A) or pay debt and invest (Strategy B)
Annual return on invested money (US equities avg ~10%)
1–40 years
Paying off debt is a guaranteed return equal to the debt's interest rate. Investing gives an expected return that's uncertain. If your debt charges 7% and you expect 10% from investments, investing mathematically wins — but with risk. If debt charges 20% (credit card), paying it off first is nearly always right.
Math doesn't capture the stress of carrying debt or the motivation boost from becoming debt-free. Some people invest better when debt-free; others stick to their strategy regardless. The "right" answer is the one you'll actually follow consistently.
| Debt type | Typical rate | Recommendation |
|---|---|---|
| Credit card | 18–30% | Pay off immediately |
| Personal loan | 8–15% | Pay off before investing |
| Auto loan | 5–8% | Borderline — math says invest |
| Student loan | 4–7% | Borderline — situational |
| Mortgage | 3–7% | Invest alongside; tax deductible |
Always contribute enough to get your full employer 401k match first — it's an instant 50–100% return, which beats any debt rate. After capturing the match, the debt-vs-invest math applies to remaining income.
If you itemize deductions, your effective mortgage rate is lower. A 6% mortgage with a 22% tax bracket has an effective after-tax cost of ~4.7% — even more borderline against expected market returns.
Strategy B pays only the interest on the debt each month (keeping the principal constant) and invests the remainder of your monthly budget. At the end of the horizon the full principal is still owed, so net wealth subtracts it. This models the classic trade-off: keeping low-cost debt and putting extra cash to work in the market.