Pay off debt or invest? How to balance both

Pay off debt or invest?

If you’ve found yourself wondering whether you should put extra cash toward paying off debt or investing, you are not alone. It’s a common question. As with many choices when it comes to personal finance, there’s no one right answer. There are advantages to both strategies.

Either approach can support a healthier financial future than simply spending extra cash. And it doesn’t have to be an either/or choice – sometimes it makes sense to pay down debt and invest at the same time. Below are a few factors to consider when deciding whether to invest, pay down debt or do both.

The basics of debt

There are many different types of debt, from student loans to credit card debt to mortgages. Debt is money that has been borrowed and must be paid back. It’s not a bad thing to have some debt (for example, a mortgage), but it’s important to manage it.

In general, lenders charge interest on borrowed money. Depending on the type of debt and its terms, unpaid interest may be added to your balance, which can increase what you owe over time. For that reason, it’s usually a good idea to make at least the minimum payment due, even if you’re deciding whether to invest extra money instead of paying down more of your balance.

Advantages of paying off debt

There are a number of reasons why it can make sense to pay down debt instead of investing. Here are a few:

Knock out high-interest debt. If you are paying an interest rate on debt that is higher than what you could earn by investing money, it might be a smart move to pay off the debt. For example, if you’re paying 16% APR or more on credit card debt, it may be difficult to earn enough in investment returns to offset that interest. In that case, it may make sense to pay down the credit card balance before investing extra money.

In contrast, if you have a mortgage with a 4% interest rate, you might be able to find an investment like a stock market index fund that could offer higher returns. For context, the S&P 500, including reinvested dividends, returned approximately 10% annually on a compounded basis from 1928 through 2025. (Returns vary by period and are not guaranteed.) In that case, investing might be a better move than paying extra money toward the balance on your mortgage. However, it’s important to remember that investing comes with the risk of having one or more negative years, which should be factored into your decision.

Improve your credit score. Another benefit of paying down debt is that it may help improve your credit score. A better credit score can help you in a number of ways. For example, you may have an easier time applying for other loans, you might, in some cases, be eligible for lower insurance premiums and you’ll likely have an advantage if you apply for an apartment.

Alleviate the stress of being in debt. It’s important to think about your mental health, not just your financial health, when making a decision about investing or paying down debt. If being in debt is keeping you up at night, it might be a good idea to pay off your balance first, and then focus on investing without feeling stressed about your debt. Paying down debt generally provides predictable interest savings, while investments carry varying degrees of risk.

The basics of investing

Investing is putting money toward something like a stock, bond, real estate or other assets with the intention to increase the value of the money you invested over time.

While not everyone actively invests their money in stocks, many people invest their money passively by contributing to retirement accounts through work, like a  401(k).

Advantages of investing

In some cases, it’s a better idea to put money toward investments instead of completely paying off debt balances. Here’s why:

Potentially earn higher returns. In general, investment returns can be higher than the interest rate on some types of debt. However, as mentioned above, this is not always the case, and there is a risk of losing money when investing. Additionally, investments can be volatile. Even though markets have historically trended upward over the long term, your investments might see ups and downs on a day-to-day basis. When investing money, it’s important to think about your risk tolerance and your long- and short-term goals.

For example, if you are saving for retirement and you are in the early stages of your career, it may be more beneficial to put money into higher-risk investments with higher return potential like stocks. At that point in your life, you have more time over the long term to make up potential losses. However, if you’re retiring in the near future, it may make sense to consider less-volatile investments like bonds.

Receive tax benefits. There are several tax-advantaged ways to invest, especially for retirement. These options include 401(k)s, Roth or traditional IRAs and other investment plans geared toward retirement savings. Generally, paying back most kinds of debt, like credit card debt, does not have tax advantages. However, in some cases, interest paid on eligible student loans or mortgages may be tax-deductible, subject to applicable rules and limitations.

Invest and pay off debt at the same time

For many people, it makes sense to work on paying off debt and investing simultaneously. Finding a balance between achieving these two financial goals looks different for everyone. Focusing too much on investing and neglecting to pay down debt can get you into a situation where you are paying more interest than you need to. At the same time, if you only focus on paying off debt, it can be difficult to meet your financial goals for retirement.

Take time to evaluate what your debt costs (including the interest rate) and review your investment options’ potential risks and returns. Then make a plan for how you’ll split extra money between paying down debt and investing. A financial advisor can help you weigh trade-offs, and a tax professional can explain potential tax implications. Everyone’s situation is different, so you should speak to a tax professional about the right approach for you.

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