Save vs Pay Down Debt
You have an extra $X each month. Throw it at the debt, or grow it in investments? The math is mostly about your debt's interest rate versus your investment's expected return.
Your numbers
Both strategies make the minimum debt payment each month. The "extra" is what you can throw at one or the other.
Strategy A: Crush debt first
Extra cash goes to debt every month. Once debt is paid off, the freed-up money (extra + former min payment) goes to investing.
Debt-free by
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Investment balance at horizon
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Total interest paid on debt
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Strategy B: Invest the extra
Extra cash goes straight to investing. Debt only gets the minimum payment, so it takes longer (and costs more interest).
Debt-free by
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Investment balance at horizon
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Total interest paid on debt
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Net position over time
The rule of thumb
Compare your debt's interest rate to your expected investment return:
- Debt APR > expected return: pay debt first. Every dollar against a 22% credit card is a 22% "return" — and risk-free. You can't beat that in the market.
- Debt APR < expected return: investing usually wins, especially if you're young (compounding has more time to do its work). But this assumes you actually invest the difference and stay invested through downturns.
- Roughly equal: psychology wins. If the debt stresses you out, pay it off. If a paid-off card would mean you'd just run it back up, build the investing habit instead.
The exceptions
- Match free money first. If your employer matches 401(k) contributions, get the full match before anything else. That's a 50–100% immediate return — beats any debt.
- Keep an emergency fund. $1,000 minimum before aggressive debt payoff. Otherwise the next car repair re-creates the debt you just cleared.
- Variable-rate debt is scarier than it looks. The "rule" assumes a fixed rate. Credit-card APRs can rise. Adjustable-rate loans can reset. Build that into your decision.
About these projections
The "Crush debt first" strategy aggressively pays debt with extra + minimum payment, then redirects 100% of the freed payment into investments. Investment growth uses monthly compounding at the rate you enter. Real returns vary — the long-run US equity average is ~7% real (10% nominal); recent decades have varied widely.
FAQ
What about student loans at 4%?
4% is below long-run equity returns (~7% real). Mathematically, invest the difference. Emotionally, paying off student loans early feels great. Either choice is defensible.
What about the mortgage?
Mortgages are a separate question because the rate is usually low, the interest may be tax-deductible, and the loan is secured by an appreciating asset. Most advice: don't accelerate the mortgage if there's higher-interest debt or you're under-saving for retirement.
The math says invest — but I keep running up the card. What do I do?
Pay the card. The math doesn't model behavior. If a paid-off card stays paid off, you've ended a cycle. If it doesn't, neither strategy works.