Should You Invest While Paying Off Debt?

The Interest Rate Rule

• If debt interest rate > expected investment return: Pay off debt first
• If debt interest rate < expected investment return: Consider investing
• The crossover point is typically 6-8%

Types of Debt to Consider:

Always Pay First (High Interest):

• Credit cards (15-25%+)
• Personal loans (10-15%+)
• Payday loans (400%+)
• Store credit cards (20-30%+)

Maybe Invest Instead (Low Interest):

• Mortgages (3-7%)
• Student loans (3-6%)
• Auto loans (2-8%)
• Home equity loans (4-8%)

The Employer Match Exception

• Always contribute enough to get full employer 401(k) match:
• It's an instant 50-100% return
• Free money you can't get later
• Even with debt, this is usually worth it

Balanced Approach Strategy:

• 1. Pay minimums on all debts
• 2. Get full employer match
• 3. Build small emergency fund ($1,000)
• 4. Attack high-interest debt aggressively
• 5. Once debt is under 6-8% interest, start investing more
• 6. Maintain emergency fund

Risk Considerations:

• Debt payoff is guaranteed return
• Investments can lose money short-term
• Your risk tolerance matters
• Job stability affects the equation

Age and Time Horizon:

• Younger investors: More time to ride out volatility
• Older investors: Less time to recover from losses
• Longer time horizon favors investing

Mathematical vs Behavioral:

• Math says invest if returns > debt rate
• Behavior says debt freedom provides peace of mind
• Choose what you'll actually stick with

The Hybrid Approach:

• 70% extra money to debt
• 30% to investments
• Provides balance between both goals
• Builds good habits for both

Red Flags - Focus on Debt Only:

• You're stressed about debt
• You use credit cards for daily expenses
• You don't have emergency fund
• Your debt is growing faster than you can pay it

Green Lights for Investing:

• You have stable income
• Debt interest rates under 7%
• You have emergency fund
• You're comfortable with investment risk