"Should I pay off debt or invest first?" The answer depends on your numbers. Enter your debt rate and expected investment return 鈥?we'll show you side-by-side 5-year and 10-year net worth projections so you can stop guessing.
How This Calculator Works
The model runs two parallel scenarios for the timeframes you select:
Scenario A: Pay Debt First
Every dollar of your available monthly amount goes to debt until the balance hits zero. After that, the same dollar amount funnels into an investment that compounds at your expected annual return.
Scenario B: Invest First
You make only the minimum payment on your debt (modeled as 2% of balance) and immediately invest everything else. The debt continues to accrue interest while your investments compound monthly.
Net worth = investments minus remaining debt. The strategy with the bigger net worth at year 5 and year 10 wins.
Advertisement
Frequently Asked Questions
What's the break-even interest rate?
Roughly the same as your expected investment return. If you can earn 8% in the market but your debt costs 6%, investing wins. If your debt costs 20%, paying it down is a guaranteed 20% "return" 鈥?far better than market risk.
Should I always pay off credit card debt before investing?
Yes, with one exception: capture your 401(k) employer match first. A 100% match is a guaranteed doubling of your money, which beats any debt rate. After that, attack credit cards aggressively.
What about student loans?
Federal student loans at 4鈥?% are usually fine to pay slowly while investing. Private loans at 8%+ are closer to credit card territory and worth aggressive payoff. Our calculator gives you the exact crossover for your numbers.
How realistic is the 8% investment return?
The S&P 500 has returned about 10% annually before inflation since 1957 and about 7% after inflation. Using 7鈥?% is the conservative consensus. Returns are not guaranteed 鈥?that's the risk premium debt payoff doesn't have.
Do I need an emergency fund first?
Most planners say build a $1,000鈥?2,000 starter emergency fund before aggressive debt payoff, then a full 3鈥? month fund after debts are gone. Without that buffer, an unexpected car repair can push you back into debt and undo months of progress.