Pay Off Debt vs. Invest
Compare the debt's after-tax interest rate against your expected after-tax investment return. Credit cards (20%+) always lose to investing. Mortgages (5-7%) are usually close to a tie. Always get the 401(k) match first regardless.
| Pay Off Debt | Invest | |
|---|---|---|
| Get 401(k) employer match | Always first | Always first |
| Build $1K emergency fund | Always first | Always first |
| Credit card debt (20%+) | PAY OFF — no investment beats this | — |
| Personal loan (12-15%) | Pay off | — |
| Auto loan (6-8%) | Pay extra if other goals met | Invest if return expectation > rate |
| Student loan (federal, 5-7%) | Pay minimums, invest extra | Long-term investing usually wins |
| Mortgage (5-7%) | Pay minimum | Invest extra — math + tax deduction favor investing |
| Investment "rate" | Guaranteed (interest saved) | Average ~10% nominal, ~7% real, NOT guaranteed |
Choose Pay Off Debt if
- Debt rate is above 10% (after tax deduction if applicable).
- You're late on payments or underwater on payment-to-income ratio.
- You sleep poorly knowing you have debt.
- You can't qualify for new credit because of high utilization.
Choose Invest if
- All non-mortgage debt is at or below ~7%.
- You have a 6-month emergency fund.
- You're maxing tax-advantaged accounts first (401k, IRA, HSA).
- You'll stay invested through inevitable downturns.
Run the numbers yourself
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