If you’re reaching the end of the month with spare money hanging around, you might think it’s worthwhile to invest it, which may be a good option. If, however, you also have debt that you’re paying off, you might find that it’s a better option to clear your debt before getting started. But how do you decide between paying off debt and investing? We’ve crunched some numbers to help you put it into perspective.
How high is your interest rate?
This is one of the key things to consider when you’re weighing up your options. Think about it this way: could you feasibly earn the equivalent of your APR in profits when you invest? The average APR of a credit card is currently around 22%.
Say you have £750 that you’re considering investing. You also have a credit card with an APR of 22% with a balance of £10,000. You’re currently paying off £250 per month. At present, this accrues about £2,114.19 per year in interest.
If you chose to pay off £250 as usual and invest the remaining £750 each month, you’d find yourself still owing £9,114.19 at the end of the year, thanks to the interest that will have been accrued. If your investments earn 5% in a year, you’ll have £9,247.51 at the end, including interest of £247.51.
Paying off £1,000 each month instead would mean that you only accrue £1,148.88 in credit card interest, but you’d receive no interest from investments. This would still make you £717.80 better off by paying down debt instead of investing.
Of course, this would change if you believe you could make more than your interest rate in investment profit, but consider that the FTSE 100 only made around 11% in the 5 years from 2015 to 2020.
If you’ve got a low interest rate, such as a mortgage, loan or a 0% credit card, there’s the chance that you could be better off using your extra money to invest in the stock market rather than pay down your debt. The main issue with this is that there’s no guarantee that you’ll make a profit, and you could get back less than you invest, so it would be a gamble that you’d be taking.
Your credit score could be impacted
If you choose to invest the extra money instead of paying off debt, your credit score might be impacted by you paying lower sums off your debt. This won’t matter much to you if you’re not looking to apply for a mortgage or significant loan in the coming years, but may be worth thinking about if you’re investing for the purpose of getting a house deposit and will therefore require a mortgage.
Bottom line
Think carefully about whether you choose to invest or pay off your debt. Take a minute to work out how much interest you’re accruing each year and work out how much you’d need to make in investment profits in order to make an overall profit.
Think of it this way – if you choose to pay off debt instead of investing, it’s almost a guaranteed win, because you won’t then accrue more interest on it over time. Investing has risks, so you don’t really know how much you’ll make from it.
This article offers general information about investing and the stock market, but should not be construed as personal investment advice. It has been provided without consideration of your personal circumstances or objectives. It should not be interpreted as an inducement, invitation or recommendation relating to any of the products listed or referred to. The value of investments can fall as well as rise, and you may get back less than you invested, so your capital is at risk. Past performance is no guarantee of future results. If you're not sure which investments are right for you, please get financial advice. The author holds no positions in any share mentioned.
Zoe was a senior writer at Finder specialising in investment and banking, and during this time, she joined the Women in FinTech Powerlist 2022. She is currently a senior money writer at Be Clever With Your Cash. Zoe has a BA in English literature and a Diploma for Financial Advisers. She has several years of experience in writing about all things personal finance. Zoe has a particular love for spreadsheets, having also worked as a management accountant. In her spare time, you’ll find Zoe skating at her local ice rink. See full bio
Zoe's expertise
Zoe has written 187 Finder guides across topics including:
Thinking about buying shares in Flutter Entertainment? We explain how to do it and compare a range of providers who will give you access to global markets.
Sales of Reckitt Bencksier products like Dettol have risen due to coronavirus. Here’s how you can invest in Dettol, by buying Reckitt Benckiser shares.
Ever wondered how to buy shares in Wincanton? We explain how and compare a range of providers that can give you access to many brands, including Wincanton.
Ever wondered how to buy shares in United Utilities? We explain how and compare a range of providers that can give you access to many brands, including United Utilities.
Ever wondered how to buy shares in WPP Group? We explain how and compare a range of providers that can give you access to many brands, including WPP Group.
Find out how to buy shares in Merlin Entertainments, see Merlin Entertainments’ share prices over the last three months and check out our must-do checklist if you’re looking to invest.
We explain how to buy shares in Howden Joinery, explaining the costs and fees you could come up against. We also have a checklist for anyone looking to invest in a company.
How likely would you be to recommend Finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser Disclosure
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
