Choosing between investing or payoff debt can be hard. While you may want to invest the money to grow your income, you also know that paying off debt faster will free up cashflow that you can use toward other financial goals.
So, how do you choose? Below we dive into how you can make the best decision based on your priorities and risk tolerance.
Top Priorities
Before investing extra cash or paying off debt, be sure you’re meeting the minimum payments on your credit card and loans. Otherwise, you can hurt your credit score and rack up large fees.
Another important step is to build up an emergency fund. That way you can weather crises as they come up, without hurting your progress towards debt-free living.
Comparing Interest Rates
The first step in deciding whether to start investing while in debt is to compare the interest rate of your debt to the expected returns of your investment. If your debt grows faster than your investments, it makes the most sense to pay off your debt quickly. Otherwise, you’re going to lose money in the long run.
To figure out your interest rate, look at all the different debts you have (like car loans, student loans, or mortgage) and calculate the weighted average. Weighted averages are a lot like normal averages; the difference is that they consider how much each individual debt contributes to your total debt.
To calculate the weighted average, you can use an online calculator. For the linked calculator, you would enter each debt’s interest rate in the “data value” column and the amount you owe for that debt in the “weight” column.
The 6% Rule
Financial experts often use what’s called the “6% rule” as a quick way to decide whether to invest or pay down debt. Generally, if your debt’s interest rate is below 6%, you’ll likely come out ahead by investing instead. This threshold balances the goal of minimizing interest costs with the long-term potential of wealth growth.
The 6% rule is a useful benchmark, but it overlooks human behavior. Even when the math favors investing, paying off debt can deliver a psychological win that builds confidence and momentum toward better money habits and financial freedom.
That said, your ideal cutoff depends on your investment strategy. If your portfolio leans conservative—with less than half in stocks—aim for a lower benchmark, closer to 5%. More aggressive portfolios, which carry higher expected returns, can justify keeping slightly higher-interest debt while you invest.
Age and career stage also matter. The earlier you are in your career, the more you stand to gain from compounding returns. Contributing to retirement accounts in your 20s or 30s can make a far bigger impact on your future wealth than paying off low-interest debt faster.
Risk Tolerance
Every investment carries some degree of risk—and understanding your comfort level with it plays a big role in deciding whether to invest or focus on debt repayment. If you’re highly risk-averse, paying off debt can offer a guaranteed return equal to your loan’s interest rate. It’s a safe, predictable way to strengthen your financial foundation.
That said, avoiding investing altogether can be risky in its own way. Lower-risk investments, such as CDs, bonds, or dividend-paying stocks, often take time to compound and grow—but starting early gives them that time. If you prefer stability, investing gradually in these types of assets while managing low-interest debt can strike a balance between security and long-term wealth growth.
As you get older, your risk tolerance typically declines because you have fewer working years to recover from market downturns. That’s why younger investors can usually afford to take more investment risk—especially when their debt carries relatively low interest rates.
Alternatives for Paying Off Debts
If your debts are overwhelmingly large, you still have options for debt repayment strategies. Consider:
- Consolidating them into a lower interest rate loan
- Negotiating a debt settlement
- Declaring bankruptcy
Bottom Line
Deciding whether to invest or pay off debt first isn’t always straightforward. The right choice depends on factors like your interest rates, risk tolerance, and long-term goals. What matters most is making steady progress—whether that’s building wealth through investments or freeing yourself from debt. By focusing on your priorities and taking it step by step, you’ll put yourself in a stronger financial position over time.
