Published on July 26, 2025 | Last Updated on September 20, 2025

Should You Invest or Pay Off Debt First?

When you have extra money each month, one of the biggest financial questions you’ll face is whether to invest or pay off debt first. Both choices can move you closer to financial freedom, but the right answer depends on your personal situation, your goals, and the type and amount of debt you are holding.

One thing is certain, regardless of what option you choose, paying off debt gives you a guaranteed return. You avoid interest charges that would otherwise accumulate. Investing, on the other hand, has the potential for higher long-term growth through the stock market, retirement accounts, or other assets. Understanding when to prioritize one over the other is key to building a strong financial foundation. Depending on your financial situation and goals, there may even be a way to blend them so you get a little bit of both actions. Let’s break this all down.

Investing vs. Debt Repayment

Investing and paying off debt are both positive financial moves, but they function very differently. Paying off debt is like earning a guaranteed return equivalent to the interest rate on your loan. For example, if you have a credit card with a 20% interest rate, paying it off is effectively the same as earning a 20% return, risk-free. If your credit card balance was $1,000 at 20% APR, then you essentially just saved yourself $200 a year in interest charges by paying it off.

Investing, meanwhile, puts your money to work in assets like stocks, bonds, or real estate. Over the long term, the stock market has historically averaged around 7–10% annual returns. But investing involves risk: markets fluctuate, and there’s no guarantee of short-term growth. This is also where you’ll want to know how much debt you have and start looking at the APR you owe on each of those debts.

The ultimate goal is to be financially free, and both of these can definitely get you there if done correctly. However, there is a mathematical and mindset approach that you should be aware of. For instance, paying off the 20% debt mentioned earlier would save you $200 a year, but if you put that same $1,000 in the stock market or other investments, there may or may not be that same return. Empower created a free tool to help you visualize debt payoff vs investing growth if you are interested in seeing what the potential returns of each with your numbers.

When Should You Invest?

There are times when it makes sense to start investing even if you still have some debt. For instance:

• Your employer offers a match to your 401K or Roth IRA account. If your company matches contributions to a 401(k) or similar retirement plan, contribute at least enough to get the full match. This is free money, and skipping it is like leaving part of your paycheck behind.
• Your debt has a low interest rate. Federal student loans or a mortgage with a 3–5% rate often cost less than the potential returns from long-term investing. In these cases, you might invest while making regular payments.
• You have an emergency fund already created. Before investing, build a safety net of $500–$1,000 at minimum, or ideally 3–6 months of expenses. Without this cushion, you risk going deeper into debt when an unexpected expense arises.
• You have clear financial goals. Investing early helps you harness compound growth for retirement, homeownership, or other long-term goals. The sooner you start, the more time your money has to grow.

Of course, be sure to create a budget and know your financial goals and status before deciding to invest. Investing is different than trading, so you typically want to think about the long-term growth of your portfolio. It’s also important to consult with a financial advisor if you have any questions about how to get started with investing. For instance, Fidelity and Charles Schwab are great options if you are looking for a reputable investment advisor.

When Should You Pay Down Debts?

If your debt carries a high interest rate, tackling it should often come before serious investing. Paying down those high-interest debts can help to save a guaranteed yearly amount. For instance, if you have $1,000 in debt with a 20% interest rate, by paying it off, you will be guaranteed to save $200 a year in interest payments. Of course, just so long as you don’t reaccumulate that debt in the future.

Here’s when debt repayment should be your main focus:

• You have high-interest credit card debt. Credit cards often charge 18–25% interest. That’s nearly impossible to “beat” with investing, so paying them off first saves you the most money.
• You carry payday loans or predatory debt. Loans with triple-digit interest rates or heavy fees should be eliminated as fast as possible.
• You have variable-rate loans. Debt with rates that can increase over time (like some private student loans) adds uncertainty and can spiral quickly. This is especially true when that variable rate starts at a higher interest rate than other debts.
• Debt is weighing on your mental health. Sometimes the emotional burden of debt is more important than the math. Paying it off can give you peace of mind and free mental space.

Blending Investing & Paying Off Debt

In many cases, you don’t have to choose one or the other; you can do both. A blended approach can provide balance and help you gain some more control over both the investments and debts. Here are a few ways to use a blended approach:

• Get the 401(k) match from your company first if it is a benefit offered. Contribute enough to retirement accounts to capture any employer match. It’s an instant, guaranteed return. Even if it’s up to 5%, that free money coming from your paycheck will slowly help you gain some footing in the investment market while gaining free money from your employer.
• Tackle high-interest debt with the other funds, not automatically being used by the company match. Focus extra payments on anything with double-digit rates. Of course, only use your money after taxes and your bills are paid.
• Invest more as you free up cash. Once high-interest debt is gone, you can increase investments while paying down lower-interest loans like a mortgage or student debt.

This hybrid strategy helps you build wealth over time while removing the heaviest debt burdens. However, since everyone’s financial situation is unique, it is important to consult with a financial advisor if you have any specific questions.

How to Pay Off Debts

If you’ve decided to prioritize debt repayment, the method you use matters. Two popular strategies are the debt snowball method and the debt avalanche method. We broke down the two below for you.

Debt Snowball Method: Focus on your smallest debts first, regardless of interest rate. Once the smallest balance is paid off, roll that payment into the next smallest. This creates quick wins and builds momentum. Ultimately, helping you to keep building on small successes that lead to larger payoffs in the future.

Debt Avalanche Method: Focus on debts with the highest interest rates first. This saves you the most money over time because you stop the biggest interest charges faster. This method takes more willpower because, unlike the debt snowball method, it will take longer to see those first wins.

Whichever method you choose, commit to it. Automating payments and tracking progress through an app or spreadsheet helps you stay on course and stay motivated. Think of the future you and how they are going to be proud of the current you, setting the foundation for financial success.

What Should You Do If You Are Really Struggling With Debt?

If debt feels unmanageable, there are still steps you can take to regain control:

• Contact your lenders to see if there is any way they can help. Ask if they offer hardship programs, lower interest rates, or deferment options.
• Look into credit counseling. Nonprofit agencies can help you create a repayment plan and negotiate with creditors.
• Avoid payday loans. Short-term, high-cost loans can trap you in a cycle of debt. They often also carry larger APRs, which can hurt your debt payoff goals.

Of course, be sure to look at your financial status first and consult with a financial expert before making any large financial decisions.

Investing Vs Paying Off Debt FAQs

What Types of Debt to Avoid?

High-interest credit card balances, payday loans, and personal loans with double-digit rates are the most damaging types of debt. They make it harder to get ahead because interest charges pile up quickly. If you can manage to avoid these, then definitely do so. 

Is It Possible to Pay Off Debt While Investing?

Yes, many people contribute to retirement accounts while paying down low-interest debt. The key is to prioritize your debts through budgeting. Tackle high-interest debt aggressively, and keep a smaller amount flowing into long-term investments.

When Should You Create a Budget?

The answer is now. A clear budget shows exactly where your money is going and helps you decide how much you can dedicate to debt repayment, investing, and saving each month. Without a budget, you risk slipping back into debt even after you’ve paid it off. This will also be essential for figuring out how much you can afford to put towards your debt paydowns and which financial strategies will work best for your situation. 

Disclaimer:

This content is for informational purposes only and does not constitute financial advice. The information provided is based on personal opinion and general knowledge. You should consult with a licensed financial advisor or professional before making any financial decisions.