To Pay Off Debt Or Invest- Which One Is Best For You?

July 30, 2018 BY Michelle Schroeder-Gardner - 25 Comments

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Should you pay off debt or invest? This is a common question I receive, and it is a difficult one to answer because every situation is different.

You may have students loans, a mortgage, car loans, credit card debt, furniture debt, medical loans, or something else. Whatever your debt may be, I’m sure you are, hopefully, thinking about your debt payoff plan.

Paying off your debt is a great thing to think about. However, where does investing come in to your overall financial plan? Paying off debt may take what feels like forever, so you may not want to completely ignore saving for retirement and investing while you pay off your debt.

And, this becomes the really tough decision to figure out – should you pay off debt or invest? Should you do both at the same time? Maybe one slightly more than the other?

If you've read How I Paid Off $40,000 In Student Loans in 7 Months, then you know that I paid off my student loans quite quickly. In order to do this, though, I had to decide whether to focus on my students loans and pay off debt, or invest in my long term savings and retirement plan.

It was an incredibly tough decision to make, but I made paying off my debt my sole focus.

Deciding to pay off my debt quickly and putting exactly $0 towards my retirement and investing did not sit well with about 50% of you readers.

But, that's personal finance – it's personal!

If you are asking yourself whether to pay off debt or invest, I can’t give you a definitive answer because everyone’s situation is so different. However, I am going to go over what factors you will want to think about for your specific situation so that you can make your own best decision.

So, should you pay off debt or invest?

Do you have an emergency fund?

To start off, I want to talk about emergency funds. So many people wonder if they should have an emergency fund while they are paying off their debt.

I am a big fan of emergency funds. If you have debt and are pondering today's question, for the most part, I think you should probably still have an emergency fund.

Now, I know that some of you may want to fight me over this, but my reason for still having an emergency fund is that you just never know when you will have an emergency. It’s just that simple. While you’re paying off debt, your emergency fund doesn't have to be the huge six months (or whatever number) of expenses.

I recommend having an emergency fund of at least $1,000 for while you're paying off debt. This is a good amount to have because you will have at least a small cushion to help you in case an expense comes up and surprises you.

If you had $0 in your emergency fund versus a small one of at least $1,000, that can make all the difference in really being able to focus on debt repayment as you will be less likely to add to that debt during your repayment period. What if you had a medical emergency, immediate home or car repair, and more?

If you didn't have an emergency fund but had debt, then this could make for a disastrous situation. Without an emergency fund, it’s likely that you would have to add to your debt, and it would most likely be at a higher interest rate because you would probably have to use a credit card.

How fast do you want to get rid of your debt?

For me, I put 100% of what I had towards debt and 0% towards investing. I chose this option because I just wanted my student loans to be completely gone. That huge monthly payment felt like such a big weight hanging over my head, and I just wanted to stop worrying about it.

If you hate debt as much as I hated my student loans, then this may be the option for you as well.

Some people, like myself, get stressed out by debt, or certain types of debt, which can then impact other areas of their lives. If having debt is leading to extra stress, which can lead to health issues, impact your relationships, work, etc. then focusing as much energy as possible on debt repayment might be the best option for you.

By eliminating your debt, you are then free to focus on improving other areas of your financial situation, such as investing for your future. This is almost like choosing to single task versus multitask – you put all of your energy into one thing so you can focus on doing it efficiently and well, and once you are finished with that, you can put all of your energy into your next goal.

What's your interest rate?

Now, there's a chance that you may not really mind debt. Debt doesn't have to be the end of the world, and many people are able to use debt to their advantage. That might sound crazy, but it can be done!

If you have a low interest rate, then this may be something that you are thinking about – investing more instead of throwing everything towards your debt.

I still remember my finance and economics professor in college talking to me about his student loans. He still had them and wasn't worried about paying them off quickly at all, because the interest rates were 2% or less. So, instead, he put as much money towards investing because he figured he could beat his interest rate by investing in the stock market and in other areas of his life.

However, if your interest rate is high, then you may want to pay it off more quickly. For example, credit card debt may have an interest rate of around 20%. There are also high interest rate student loans (such as with private student loans), crazy expensive leases (such as on furniture), and more. These are the types of debt that you will really want to focus on because as that interest adds up, you ended up paying exponentially more in the long run.

If you think your interest rate is high, then you will probably want to think about getting rid of your debt quicker, because the interest is just going to keep piling up until it just seems so unmanageable, and this can make your long term investing goals seem impossible to reach.

Personally, I think that if your interest rate is around 6-8% or higher, then you may want to think about paying off that debt a little quicker so that the interest charges don't build up too high.

Do you get a company match?

If your company provides a 401(k) match, then this is a benefit that you will most likely want to accept as you decide to pay off debt or invest. If your company matches your 401(k) contribution, they are giving you money, for free. Even if you add a little in, you can still take advantage of their contribution.

If you don't take it, then you are leaving a valuable benefit on the table, one that you have earned by working. It's not like you would just let the company keep a paycheck of yours, so you should most likely treat a company match similarly!

Don't fret.

While I realize that choosing to pay off debt or invest can be an incredibly hard decision to make, you should know that you are on a good path either way. Having the option to choose between paying off debt and/or investing will bring you closer to achieving your financial goals, and the fact that you are doing one or the other means you are making a positive decision for your future.

This is really important when deciding which to focus on – both choices are good. If you are just absolutely stuck, then you may want to put half towards your debt and half towards your investments, so that you can move on with life and spend more time improving your finances in other areas.

Also, remember that personal finance is personal. What may have been a great decision for one person may not be the greatest for another. You will want to weigh your options and see what is best for your specific situation.

What would be your choice? Should you pay off debt or invest? A healthy balance of the two?

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About Michelle Schroeder-Gardner

Michelle is the founder of Making Sense of Cents, a blog about personal finance and traveling. She discusses how her business has evolved in her side income series. She paid off $40,000 in student loans by the age of 24 mainly due to her freelancing side hustles. Click here to learn more about starting a blog!

Comments

DNN says
July 30, 2018 at 6:38 am
Good morning Michelle,
I feel the best option for me would be to pay off any debt anyone possibly accrued and here’s why. Paying off debt would give anyone a piece of Mind knowing they don’t owe anyone anything. It allows anyone to free up their mind whereas they could move forward with other business projects after personal debts are satisfied. Additionally, paying off personal debt would be the best option before making any type of physical investment. Creditors run credit checks to see if the borrower has any outstanding liens, debts, or any financial obligations they need to satisfy before borrowing money from any financial institution.
Moreover, I’m all for paying off debt first before investing because let’s say for example if a person gets into real estate and they need to borrow a few million bucks to get their real estate projects started. They have an outstanding debt with someone they forgot to pay off. The person may be a “side hustle millionaire”in the making but may have accidentally forgotten or overlooked satisfying one particular debt. The [side hustle millionaire] in the making probably has thousands of dollars in their bank account and could very well finance their own real estate project instead of borrowing money to invest in the real estate project. Because the side hustle millionaire in the making has one particular debt outstanding in which they forgot to satisfy and the creditor saw that on their credit report, the application for a loan was instantly denied.
This is why I’m all for paying off debt first before making any type of investment because once your debts are satisfied and you make sound Investments, no one can come to you later down the road and say “you owe me this and you owe me that.”
This is why side hustling and making and money online should be a labor of love for anyone. It helps anyone pay off debt, puts themselves in the position to be a future “side hustle millionaire,” and make more than enough money to “invest in other businesses.” 🙂
Reply
- Michelle Schroeder-Gardner says
  July 30, 2018 at 8:02 am
  Thank you!
  Reply
  - DNN says
    July 30, 2018 at 3:14 pm
    You’re welcome. 🙂
    Reply
- Samantha says
  April 28, 2019 at 8:08 am
  Except when a company will match at a rate that our paces any debt you have and the interest it accrues, are you considering the short term over the long term? For example I have a very generous match at work when you add that and the market movement it is nearly double the amount of money I personally had to put in that is accruing currently (I understand the market goes in waves), but if you work for a company that matches paycheck to paycheck you need to take into consideration your mindset and the totality of the circumstances.
  For my retirement account, I chose not to even consider that part of my income and to not look at it often so I don’t get anxious- and the times I do I’m always pleasantly surprised that I’m finally making progress in that area of my life.
  Reply
Renee says
July 30, 2018 at 7:18 am
This was exactly what I needed! We are so close to paying off our final debt that I was debating having my husband stop is 401K contribution because I so badly want to be done with it. However, his company does an awesome job of matching contribution.
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- Michelle Schroeder-Gardner says
  July 30, 2018 at 8:03 am
  It can be a hard decision. How far away are you from debt payoff?
  Reply
Michael says
July 30, 2018 at 8:07 am
Great post Michelle! I love the line “Remember that personal finance is personal”. This is so true! If you look at the math it makes more sense to invest then to pay of certain debts like your mortgage or student loans because the interest rate on these types of debts are usually low and you will make more interest if you invest your money in the stock market. But… like you said it’s personal and for most people having that debt is such a burden so paying it off first is better for them. Also, you can allocate a percentage like 70% to debt and 30% to investments. It’s all about what you feel comfortable doing, what is important is that you are taking action and getting you financial life under control!
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- Michelle Schroeder-Gardner says
  July 30, 2018 at 10:38 am
  Yes, exactly!
  Reply
Jorge says
July 30, 2018 at 10:29 am
I went through this same scenario a couple of years back.
Pay off my credit card debt (which had a high interest rate!) or invest.
I ended using an offer from another one of my credit cards for a 0% balance transfer for 18 months and then instead of paying off that debt, started to fund my investment accounts.
Reply
- Michelle Schroeder-Gardner says
  July 30, 2018 at 10:39 am
  Is your debt paid off now?
  Reply
Jaymie says
July 30, 2018 at 11:55 am
Great article! You did what I fully believe in…Having A Laser Focus on your goal. You did it and are such an inspiration! Love your work!!! 🙂
Reply
- Michelle Schroeder-Gardner says
  July 30, 2018 at 3:40 pm
  Thanks!
  Reply
Melissa says
July 30, 2018 at 2:19 pm
Just what I needed to read today! I’ve been going back and forth with this question the last few days. Thanks!
Reply
- Michelle Schroeder-Gardner says
  July 30, 2018 at 3:40 pm
  Glad to help 🙂
  Reply
Tabi says
July 30, 2018 at 3:05 pm
Even the financial experts like Suze Orman, Dave Ramsey and Dani Johnson recommend paying off debt first and then invest.
Reply
- Michelle Schroeder-Gardner says
  July 30, 2018 at 3:40 pm
  🙂
  Reply
- Chris @ Duke of Dollars says
  July 30, 2018 at 6:07 pm
  I don’t feel that three people represent the totality of the decision, and recommend reading more into it before making your final answer :).
  Dave Ramsey’s first investment advice was to put your money in money market funds over stocks – it is just hard to consider that a great move for those who are young like myself.
  Reply
Chris @ Duke of Dollars says
July 30, 2018 at 6:05 pm
I chose to contribute the max to my 401(k) and Roth IRA, then focused on paying down debt.
The two main reasons for this were as follows:
1. Maxing my 401K – Reducing my tax burden each year and taking advantage of gross income as I begin building my nest egg. Gross income really helps drive the investment up that will compound for years to come; I will admin to being fortunate here, because my company offers great funds with small expense ratios.
2. IRAs are a one year deal every 12 months – you get to take advantage of that year or you lose that opportunity for good. With maxing out my 401(k), and my loans being below 6% interest, the benefits of having those tax free withdrawals in the future will outweigh the savings of my debt.
After the retirement accounts were maxed (HSA in progress, as it was my first year with one), then I made the decision to pay down debt over taxable brokerage accounts. There were no tax advantages and with my interest rates, no big advantage of investing first.
I guess overall I took a balanced approach, and can’t wait to lift the burden on my shoulders each month; further, you will never hear me tell someone they are wrong for focusing on their debt full-steam ahead – like you said, it is a personal choice!
Reply
FIbythecommonguy says
July 30, 2018 at 9:00 pm
I invested first while paying down debt with minimum payments. Once I was able to max out on the investment side, I focused on paying down debt as fast as I could. For me, I wanted to take advantage of my companies 401K match (free money), start a portfolio, and other investment opportunities. Plus, the loans we did have (2 student loans, car loans, and a mortgage), had relatively low interest rates.
Reply
Bernz JP says
July 31, 2018 at 1:39 pm
Yes, personal finance is truly personal. In my case, I was investing and at the same time slowly paying off my debt. In the end, the money I made from investing was used to finally paid off the remainder of my debt.
Reply
Xrayvsn says
July 31, 2018 at 2:38 pm
I chose to pay off debt completely over potentially investing the extra money I had. I feel it was the best decision for me as it gave me a lot of financial peace. I know I could have made more money if I had invested it giving the bull run in the market we have had for so long, but that was not guaranteed when I made my decision.
One of my favorite posts on my blog, “Every Blade Of Grass,” describes the moment that I owned every blade of grass on my property and not the bank. Lot of non-monetary rewards of being debt free, so can’t always fault a decision if it didn’t bring the most money to the table.
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Kris says
July 31, 2018 at 3:21 pm
I think a few factors can determine whether you want to pay off your debt or invest…or maybe both. You bring a lot of good points but the bottom line is that it’s your personal decision. It’s a matter of how motivated you are in paying it off.
Everyone should try to pay off their debt especially if they have high interest rates but if you are in a situation where the interest rates and you are really willing to invest some of your money then go for it. I did that with the intention of cashing out my investment account to pay off the rest of my student loans.
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Nat says
July 31, 2018 at 10:18 pm
An emergency fund is a must and as Kris just said, it comes down a lot to the interest versus what you can earn.
Thanks and love site layout.
Reply
Hamster says
August 2, 2018 at 10:25 am
Great post! This question (or debate, rather) comes up a lot.
Being from South Africa my situation is a little different. Our (the wife and I) situation here is a little different, because of our interest rate environment. Our mortgage rate is at 9.5% which is quite high, so paying off debt aggressively makes a lot of sense, since it is quite difficult to consistently beat 9.5% with your investments (especially after taking taxes into account when selling investments to realise a real return).
So, we’re pushing our mortgage really hard, trying to pay it off in under 6 years. We do invest as well, maxing out our TFSAs (tax free savings accounts) and putting a fair amount into our Provident Funds (similar to a 401k) as well. But, paying off debt in this high-interest rate environment really makes a lot more sense to me than investing more and letting the debt churn out a lot more interest over the years…
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joe peterson says
November 30, 2018 at 1:48 pm
Credit cards and student loans are a different kind of debt than a mortgage. The decision to pay off credit card debt as quickly as possible is easy to make. A mortgage payment, in a sense, is a monthly investment into an asset. Also, mortgage interest can be deductible if you meet the threshold to itemize your taxes, which early in the life of the mortgage can be easy to do.
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