Side-by-side comparisons
Pay off debt or invest? The math, by interest rate
The setup
You have $500 per month and a $15,000 credit card balance at 22%. Do you crush the card first, or start investing now? We model both for 5 years and show the gap.
Option A
Pay off the 22% credit card first
After 5 years
Final balance
$99,450
Total contributions$45,000
Total interest+$54,450
Tax & risk: Guaranteed 22% 'return' (interest avoided). Risk-free.
Run this in the calculator →Option B
Invest at 8% while paying minimums
After 5 years
Final balance
$36,983
Total contributions$30,000
Total interest+$6,983
Tax & risk: Average market return, not guaranteed. Card keeps charging 22%.
Run this in the calculator →Difference
$62,467
Any debt over ~10% APR? Pay it off first. The certainty of avoiding 22% interest beats the average 8% market return after taxes and risk. The breakeven rate is roughly your expected after-tax investment return — for most people, that is 6–7%. Anything above that, paying off debt is mathematically correct.
Which is right for you?
If
Debt rate > 10% (credit cards, payday loans)
Then
Pay off the debt first. No exceptions.
If
Debt rate 6–10% (private student loans, some auto loans)
Then
Roughly equal. Lean toward debt payoff if it stresses you out, investing if you have a long horizon.
If
Debt rate < 6% (mortgages, federal student loans)
Then
Invest. Pay the debt on schedule. The expected market return beats your interest cost.
If
Employer offers a 401(k) match
Then
Always capture the match first, even if you have credit card debt — a 50–100% match beats any debt rate.
Key takeaways
- Avoiding 22% interest is mathematically equivalent to a guaranteed 22% return — far above any safe market expectation.
- The market averages 7–10% but with volatility; your debt rate is fixed and certain.
- Always capture an employer 401(k) match first — that is the only thing that beats high-interest debt payoff.
FAQ
What about my emergency fund?
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Build a $1,000–$2,000 starter emergency fund before aggressively paying off debt. Without it, the next unexpected expense goes back on the credit card and you start over. After the high-interest debt is gone, build the full 3–6 month emergency fund.
What if my mortgage is at 3%?
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Don't rush to pay it off. A 3% mortgage is one of the cheapest forms of debt in modern history. Most diversified portfolios beat 3% over 10+ years. Pay it on schedule and invest the difference. Exception: if peace of mind from being debt-free matters more to you than optimal math, pay it off — emotional return is real.
Should I split my $500 between debt and investing?
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Generally no — focus beats split. Concentrating all extra payments on one high-interest debt clears it 30–50% faster than splitting. Once the high-rate debt is gone, redirect 100% of those payments to investing. The exception is the 401(k) match, which always comes first.