Full disclosure: I am a proud affiliate, meaning if you click a link and make a purchase, I may earn a commission at no extra cost to you. My recommendations are based on deep experience with and knowledge of the products I mention and I recommend products only when they are genuinely helpful and useful, not because of the small commissions I may receive. Please don’t spend any money on products I recommend unless you genuinely believe they will help you achieve your goals.

Have you ever found yourself wondering the following: should I pay off debt or invest? 

It’s a difficult question to answer, as both options have merit.

This dilemma plagues many on the path to financial freedom. Both strategies can make sense, but the right answer for you depends on your unique circumstances.

If you find yourself struggling to answer the “pay off debt or invest” question, then keep reading on and you’ll have the tools to answer this question once and for all.

This article will empower you to make an informed decision about how you can effectively manage your money, whether your goal is early retirement (FIRE) or simply achieving greater financial security.

Why the “Pay Off Debt or Invest” Question is Hard to Answer

Most of us live on fixed incomes, and sometimes it’s a struggle just to make it to the end of the month. (especially with inflation of late… yikes)

That said, it can be quite the debate deciding what to do with what little excess may be left.

Paying off debt can help you in the long run. You won’t have to continue paying off a monthly balance once your debt is paid off, which means extra money in your pocket at the end of each month (assuming you continue to live below your means).

However, investing also can also benefit you. In fact, over time, you can even live off of your investments using the 4% rule. 

Ideally, it would be great to put funds toward both goals, but how do you decide which to focus on?

We’ll talk about the specific benefits of focusing on each goal first.

The Debt Destroyer: Why Paying Off Debt Rocks

Debt can feel like a heavy weight on your shoulders, and sometimes there’s no better feeling than getting rid of it once and for all.

Here’s how tackling your debt can benefit your financial journey:

• Reduced Interest Payments: Every dollar you pay towards debt is a dollar saved on interest. This frees up more money for saving and investing in the future.
• Improved Credit Score: Paying off debt helps improve your credit score, potentially lowering interest rates on future loans and mortgages.
• Peace of Mind: Being debt-free reduces financial stress and allows you to breathe easier, giving you more control over your finances.

Example: Imagine you have $10,000 in credit card debt with a 15% interest rate. Minimum payments might keep you afloat, but they won’t make a dent in the principal. By prioritizing paying off this debt, you’ll save thousands in interest and be free of that burden.

The Investor’s Edge: Why Investing Can Be Your Ticket to Financial Freedom

Investing has the potential to grow your wealth significantly over time. Here’s why it deserves a place in your financial strategy:

• The Power of Compound Interest: Albert Einstein called compound interest the “Eighth wonder of the world.” Investing allows your money to grow exponentially over time, accelerating your wealth accumulation.
• Inflation Hedge: Inflation erodes the purchasing power of your money. Investing in assets that historically outperform inflation, like stocks, helps your money retain its value.
• Passive Income: Over time, your investments can provide you passive income, as in money you earn without having to work (i.e. passively earned).

Example: Let’s say you invest $5,000 in a diversified portfolio that grows at an average annual rate of 7% over 20 years. Thanks to compound interest, your investment could grow to approximately $34,864!

Finding Your Financial Sweet Spot: 5 Key “Pay Off Debt or Invest” Considerations

Deciding whether to pay off debt or invest is a personal choice. Here are 5 key factors to consider:

1. Personal Situation: How much debt do you have? What are the interest rates? Knowing your debt landscape is crucial. For instance, if you have wickedly high interest credit card debt, you may want to consider paying this debt off before prioritizing investments.
   
2. Goal Focus: Is your primary goal to achieve financial freedom early (FIRE) or simply build long-term security? If FIRE is your goal, investments may be more of a priority, but if long-term security is more important, then debt might matter more to you.
   
3. Investment Knowledge: Are you comfortable with the risks associated with investing? Educate yourself before putting your money in the market.
   
4. Family Needs: Do you have dependents or short-term financial obligations that require prioritizing stability over potential investment gains?
   
5. Existing Funds: How much money can you realistically allocate towards debt repayment or investments? Consider your current savings and income.

Focused on Debt Payoff? 2 Strategies to Consider

Is conquering debt your main focus? Here are two approaches to consider:

• Debt Avalanche: Focus on paying off high-interest debt aggressively while making minimum payments on lower-interest debt and simultaneously investing a portion of your income.
• Debt Snowball: Prioritize paying off the debt with the smallest balance first, regardless of interest rate. This can provide a psychological boost and encourage you to keep going.

Focused on Investments? Resources to Support Your Investing Goals

Regardless of how you choose to invest, I highly encourage you to learn everything you can about investing before you dive in. 

If you’re more focused on your investments, then here are a few articles to help you get started:

#114: How to Create a FIRE Investment Strategy for Personalized Success

Investing for FIRE 101: 5 Simple Tips to Help You Start Investing in the Stock Market

Investing for FIRE 102: 4 Simple Steps for Getting Started: Investing in the Stock Market

Investing for FIRE 103: How Your Investments Can FIRE Your Financial Freedom Goals

Investing for FIRE 104: Portfolio Diversification: Factors to Consider When Choosing Investments

Investing for FIRE 105: Passive Investing

Investing for FIRE 106: Strategic Asset Allocation: Adjusting Your Investments for FIRE

Here are a few books I recommend as well:

The Bogleheads’ Guide to Investing (a great intro to investing book)

A Beginner’s Guide to the Stock Market (a more detailed investing book)

The Power of Balance: Why Not Both?

The good news? You don’t have to choose between paying off debt or investing exclusively. Consider a balanced approach!

You might allocate a percentage of your funds to debt vs. investments, such as 50/50, or 80/20. You might also consider a specific dollar amount, like $100 to each bucket.

Remember: Investments are inherently risky. While the potential rewards are great, there’s always a chance of losing money. Carefully research and diversify your investments to mitigate risk. 

Regardless of your chosen approach, continuously educate yourself on debt payoff strategies and investment tools.

By making informed decisions and taking action, you can unlock your financial potential. 

So, pay off debt or invest? The answer is: it depends on your goals! But with the right strategy, you can achieve both and pave the path to a secure and prosperous future.

Have a question or want to learn more? Leave a comment below!

Now that you’ve learned how to answer the question, “pay off debt or invest?” you might be wondering how else you can FIRE Your Career. Check out the posts page for more ways you can FIRE Your Career and achieve financial freedom.

FIRE Your Career: Achieve Financial Freedom Through Your Career & Spend MORE Time Doing What You Love.

Resources I Recommend in This Article:

The Bogleheads’ Guide to Investing (a great intro to investing book)

A Beginner’s Guide to the Stock Market (a more detailed investing book)

Resources I Frequently Recommend:

Strengths Finder (book to help you uncover your innate strengths, includes a free personality quiz)

ClickUp (my recommended goal-tracking and project-management tool)

Rich Dad, Poor Dad (a great intro to financial freedom book)

The Bogleheads’ Guide to Investing (a great intro to investing book)

Others: 16 Books I Recommend to FIRE Your Career