Invest vs pay off debt: which is better?
The short answer
Pay off any debt above 7% interest before investing anywhere except an employer retirement match. Below 5%, invest and let the debt sit. Between 5-7% is personal — psychology often matters more than the math.
Signals to weigh
- 01Debt interest rate — the guaranteed return you get by paying it off.
- 02Employer retirement match — always capture this first; it's a 50-100% instant return.
- 03Emotional weight of the debt — sometimes paying it off is worth suboptimal math.
- 04Job stability — high-debt-plus-uncertain-job favors paying it down faster.
How to decide
- Step 1List every debt: balance, rate, minimum payment.
- Step 2Capture the full employer match — non-negotiable.
- Step 3Attack anything above 7% APR aggressively.
- Step 4Below 5%, invest the difference in low-cost index funds.
Framework used
Cost-Benefit Analysis →Full walkthrough of the framework, with examples and pitfalls.
Consider these alternatives
- ·Refinance or consolidate — sometimes moves 8% debt to 5% and changes the math entirely.
- ·Debt snowball (smallest first) if you need psychological wins to stay disciplined.
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