Investing vs. Paying Off Debt: Which Is Better?

If you have credit card debt, you may wonder if using your extra cash to pay down balances or invest is better. With only so much money, how do you know which option should come first?

On one hand, investing helps grow your money over time, especially if you start early. On the other hand, high-interest debt can drain your finances and cost you more the longer it sticks around.

Should you pay down debt or focus on investing?

At some point, almost everyone asks the same question:

What should I do with my extra cash? Should I put it in the stock market or focus on paying down my credit card debt?

Well, there really is no “right” answer for everyone, since it depends on your interest rates, your financial goals, your savings and your lifestyle. What works for one person might not make sense for another.

But there are a few general rules that can help you decide.

First, how much debt do you have, and what’s the rate?

It can make more financial sense to focus on paying down debt if it has an interest rate above about 6% or higher, based on Fidelity’s research.

This advice assumes that your guaranteed savings from eliminating interest charges often beats what you might earn from investing.

Typical interest rates based on debt type

High-interest debt grows quickly and can cancel out any gains you’re trying to make elsewhere. So, paying it off is essentially like earning a guaranteed return, since you’re reducing your interest charges.

• Credit cards. Often 18% to 30% APR. These should almost always be your top priority.
• Payday loans. Extremely high rates, sometimes triple digits.
• Personal loans. Usually 6% to 15%. Depends on your specific rate.
• Student loans. Can range from low (3%–5%) to moderate (6%–8%+).

Second, how are your investments looking?

The earlier you start investing, the more you benefit from compound growth. But before you go all in, make sure you’ve asked yourself these questions first:

• Do I have an emergency fund? Ideally, you’ll want to have three to six months of expenses saved up for emergencies.
• Am I already contributing to retirement? If you’ve been saving for retirement for a while and are on track, you might be OK.
• Am I behind on savings for my age? If you are behind, investing sooner may matter more than paying off debt in the long term.

For reference, the general rule of thumb for retirement savings by age is:

• By 30, recommended to have at least 1x your annual salary saved
• By 40, recommended to have at least 3x your annual salary saved
• By 50, recommended to have at least 6x your annual salary saved

If you’re really behind in terms of retirement savings, it may be time to start prioritizing it instead of paying off debt (provided that debt isn’t causing major financial issues in your life).

Third option: Could invest and pay off debt

It doesn’t have to be an either-or decision — you can always split your extra cash between investing and paying down debt. This way, you make progress on both goals without feeling like you’re falling behind in one area.

For example, you could put 50% of that extra cash toward additional debt payments, and invest the other 50% in a retirement account.

Quick glance: Investing vs. debt payoff vs. both

How are you feeling about your finances?

Stress and mental load aren’t exactly tangible, but they are very real.

If a specific debt is constantly stressing you out, keeping you up at night or making you feel stuck, paying it off might be worth it even if the numbers tell you that investing makes more financial sense. And if you feel anxious about not saving for the future at all, start investing, even in just small amounts, so that you don’t constantly feel stressed about falling behind.

Money is emotional, so don’t ignore that when you’re deciding whether to invest or pay down debt.

Other things you can do with extra cash

Investing and paying off debt aren’t the only things you could do with extra money. Depending on your situation, it might make sense to pause and focus elsewhere:

• High-yield savings account. High-yield savings accounts earn around 4% to 5% APY while keeping your money accessible for emergencies or short-term goals.
• Take a pause. If you’re unsure, there’s nothing wrong with waiting and not making a rushed decision.
• Saving for children. Contribute to a 529 plan for education (tax advantages) or a custodial account.
• Home upgrades. Make home upgrades that can make your house more comfortable to live in, like adding energy-efficient appliances or minor renovations.
• Essential repairs. Fixing your car or home can prevent bigger and much more expensive problems later.

Bottom line

There’s no one-size-fits-all answer to investing vs. paying off debt. The answer really just depends on how much debt you have, whether you have any savings at all and how much of a burden not having savings (or having costly debt) is giving you.

And in many cases, it might make the most financial sense to do a bit of both instead of just choosing one.

Frequently asked questions

• What is the 70-20-10 rule in investing?

  The 70-20-10 rule in investing means allocating 70% of your income to living expenses, 20% to savings and investments, and 10% to debt repayment or giving.

• What are the debt payoff strategies?

  There are many debt payoff strategies, but the two most popular ones are the debt snowball (pay off smallest balances first) and the debt avalanche (focus on highest interest rates first).

• Will credit card debt eventually go away?

  No. Your credit card interest will continue to accumulate over time. Credit card debt doesn't disappear unless it's paid, settled or discharged in bankruptcy.

• What is the seven-year rule for credit card debt?

  The seven-year rule means that each negative mark remains on your credit report for seven years. After seven years, the negative mark must be removed from your credit report automatically. That said, though unpaid credit card debt may fall off your credit report in seven years, you may still have to pay it.

To make sure you get accurate and helpful information, this guide has been edited by Bethany Hickey as part of our fact-checking process.

Written by

Jamela Adam

Contributor

Jamela Adam is a personal finance writer with over three years of experience. Her work has been published in major publications, including Yahoo Finance, Forbes Advisor, U.S. News, Business Insider, GOBankingRates, CNN Underscored, and Chime. Jamela previously worked as a content marketing specialist and helped devise content strategies for major brands in the financial services space. She is also a Certified Financial Education Instructor (CFEI). See full bio