The Moment
You have extra money — a raise, a bonus, reduced expenses — and two competing pulls: eliminate debt or grow wealth. Both are financially rational. The question is which one is more rational for your specific numbers.
The Short Answer
Compare the guaranteed return of paying off debt (your interest rate) against the expected return of investing. High-interest debt almost always wins. Low-interest debt is a closer call.
Decision Logic
The core comparison Paying off debt at 20% APR is a guaranteed 20% return. Investing in a diversified portfolio has historically returned 7–10% annually — but that is not guaranteed, and it is before taxes.
The threshold framework Above 8% APR: pay off debt first — the guaranteed return exceeds realistic after-tax investment returns. 4–8% APR: split or use personal preference — the math is close enough that psychology and liquidity matter. Below 4% APR: invest — expected returns likely exceed the debt cost, especially with tax-advantaged accounts.
Always capture employer match first A 50–100% employer 401(k) match is a guaranteed return that beats almost any debt rate. Capture the full match before directing extra money to debt.
Run Your Numbers
Enter your debt rate and expected investment return to see which option comes out ahead over your time horizon.
Auto Loan vs. Cash Planner
Should you buy outright or finance and keep the cash invested? The arbitrage between your loan rate and your investment return drives the answer.
~$6,450 in favor of financing over 5 years
Educational illustration — not financial advice. Math: @/lib/finance/auto.ts (autoLoanVsCash). Compares interest paid on the loan vs. opportunity gain on equivalent invested cash. Real outcomes depend on your tax treatment of investment gains and discipline holding the cash invested.
Common Mistakes
Ignoring the employer match — always capture it first. Treating expected investment returns as guaranteed — they are not. Ignoring the psychological value of being debt-free — if debt stress is affecting your decisions, paying it off has real value beyond the math. Forgetting taxes — investment returns are taxable; debt interest savings are not (usually).
What Changes the Answer
Tax deductibility: Mortgage interest may be deductible, which lowers the effective cost of that debt and shifts the comparison.
Emergency fund status: If your emergency fund is thin, building it takes priority over both debt payoff and investing.
Time horizon: Longer investment horizons make investing more attractive because there is more time to absorb volatility.
What to explore next
- →Am I capturing my full employer 401(k) match?
- →Is my emergency fund adequate before I do either?
- →Should I split the extra cash between debt and investing?
Frequently Asked Questions
What interest rate is the threshold for paying off debt vs. investing?
A common rule of thumb is 6–8%. Above that rate, paying off debt offers a guaranteed return that is hard to beat after taxes. Below that rate, investing in a diversified portfolio may come out ahead over the long run.
Should I always get the 401(k) match before paying off debt?
Almost always yes. A 50% or 100% employer match is a guaranteed 50–100% return on that contribution, which exceeds virtually any debt interest rate.
Does it matter if my debt is tax-deductible?
Yes. Mortgage interest may be deductible, which lowers the effective cost of that debt. A 6% mortgage with a deduction may have an effective cost of 4–5%, which shifts the comparison toward investing.