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Should You Invest Or Pay Off Your Debt?

By Edited Nov 13, 2013 2 4


Debt free or investment sound

The simplest answer is to go with whatever has a higher rate of interest / rate of return. There is barely any math to be done here. All you need is a clear understanding of what you will get by investing your money and the likelyhood of that happening. For example, if I have an extra $100 and the following options, I'd choose them in this order:

Credit card debt interest: 16% (pay off first and completely)
Stock market rate of return: 10% (invest next)
Mortgage rate: 7% (pay minimum)

Although, you should know that in a research study, Consumer Reports found that it's almost always a better decision to invest rather than aggressively pay off your mortgage. Of course, there are other factors. For example, if you're already near retirement age and putting money in the stock market would be too risky, paying off that mortgage is almost certainly a better choice and with credit card interest as high as 20%, personal loans at 15%, fixed mortgages at 5% and student loans hanging around the same, it is easy to see how investing on eliminating your debt might be the best investment. The interest rate you're paying on your loan becomes your ROI each month. It is hard to find investments that will IMMEDIATELY give you 15%-20% return on your investment, so working towards eliminating that debt might be your best option. 

The Key Is To Run A Simple Analysis.

I hate when people blindly throw their money in the air and getting into unplanned debt. You should never do an investment decision without thinking about it and coming out with a plan. Yes, I have previous articles where I state you should get into debt to become wealthy and use your credit card for a better ROI but as I state, this are educated planned investments. You should always plan, test, and re-test those plans before making any financial decisons.

People like to come up with the excuse of time, "I just don't have the time to sit down and work on all that." Guess what? It may only take you 5 minutes. For example, should I stay at home to take care of the kids, or work and pay for daycare? There is a simple break-even analysis that you can extend to pretty much anything. Read it like this: If I want to pay for X, how many hours do I need to work to pay for it?

Let's say daycare for two kids costs $300 per week and you earn $15/hour. 300 / $15 = 20 hours of work needed to break even. If you can work more than 20 hours, then financially speaking, you'll make more money.

I understand there might be other incentives like emotional stress or if an option makes your happier over another, but it's hard to put a price on that. I'm talking from a financial stand point alone. If it would make you happier to take care of your kids then that's worth more to you than the money you would have earned and that's just fine! Just remember to do the cold math first then add the "emotional variables" (if any) before making any decision. This method of thinking is how you should approach any and all financial decision. 

You can use any break-even calculator if you want to tinker with the numbers a bit more.
Variable costs: Set this to zero.
Fixed cost: The cost of the goods in question (in this case, $300)
Expected sales: Use any high number.
Price per unit: Your hourly wage.

Apply this to questions like:

Should I keep going to the gym, or buy a treadmill for my house?
How many movies do I have to rent from Netflix to break even on the monthly fee?

Calculate Your Own Numbers

The scale

Since we're not all in the same financial situation, what's the right investment for me might not be the right investment for you. The point here is to change the way your mind frames things into a better frame of reference so you can make smart investments, not just go by your gut.

Do not be scared by the numbers. If you invest your time to look for the best action, you will feel better about making a certain decision and it will save you from the mental stress of the all-dooming question, what if? What if I had done X instead of Y? What if I made a mistake? You won't have to worry about the fear that you made a mistake because you made an educated and planned decision. Trading those few minutes for that peace of mind has been the best trade I ever made. Do it for long enough and it becomes an instantaneous reaction to decision-making so you can make decisions on the fly with a higher ROI.

So, what about you? Should you invest or pay off you debt? Have you been making the right decisions?




Aug 9, 2013 10:29pm
Excellent points! I might also add though that working to pay off your debts first can help someone make some powerful lifestyle changes. This may actually help them out more in the long run. Check out an article I wrote similar to your subject:

Good read and thanks for sharing!
Aug 12, 2013 9:30am
Hi Jssaggie12,
I agree. It's not a one size fits all; each individual has to take a hard look into their situation and see what's best for them. For some, getting out of debt first is the best solution. Thanks for reading and keep up the good work on InfoBarrel.
Aug 11, 2013 11:53am
Actually, I never like getting into debt. I believe in investment. I have always resorted to my investment returns to pay for all my bills.

Your points are very useful. Thanks
Aug 12, 2013 9:28am
Hi Moronkee,
you have point. I believe in investments too but not everyone comes to this way of thinking early enough to not get in debt. It might be small debt but debt it is. Also, some investments require you to take out loans (debt) but as you point it out, they are investments not the life sucking debt that we all hate. Thanks for taking the time to read and comment :)
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