Pay Off Debt vs. Invest Calculator
Strategy Comparison
Debt Amount
Debt Interest Rate (%)
Extra Monthly Payment
Expected Investment Return (%)
Comparison Period (Years)
years
The Debt vs. Investment Dilemma
It's one of the most common questions in personal finance: "Should I use my extra money to pay down debt, or should I invest it?" The answer isn't always simple and involves a mix of math and psychology.
This calculator models the two scenarios to show you the potential long-term impact on your net worth. By comparing the guaranteed return of paying off debt (your interest rate) against the potential, non-guaranteed return of investing, you can make a more informed decision that aligns with your financial goals and risk tolerance.
How to Use This Calculator
1. Enter Debt Details
Input your total debt amount and the annual interest rate for that debt.
2. Define Your Strategy
Enter the extra monthly payment you can afford and your expected annual return if you were to invest that money.
3. Set a Timeline
Adjust the slider to set the number of years you want to compare the two strategies for.
4. Compare Outcomes
Analyze the side-by-side results and the chart to see which strategy—paying off debt or investing—yields a higher net worth over your chosen timeline.
How to Interpret The Results
The "winning" strategy is the one that results in a higher net worth at the end of the comparison period.
Generally, if your expected investment return is higher than your debt's interest rate, investing first often comes out ahead mathematically over the long term. This is because your money has the potential to grow faster than your debt is costing you.
However, paying off debt offers a guaranteed, risk-free return equal to your interest rate. For high-interest debt (like credit cards), paying it down is almost always the optimal choice. For low-interest debt (like a mortgage), the decision is less clear and may come down to your personal comfort with holding debt.
Take the Next Step
Once you've decided on a strategy, you can plan your next move.
- If you're focusing on investing, see how your wealth can grow with the Compound Interest Calculator.
- If you're tackling debt, understanding your Savings Rate can help you find more money to accelerate your progress.
Frequently Asked Questions
Should I pay off debt or invest?
The decision depends on the math and your risk tolerance. Mathematically, if your expected investment return is higher than your debt's interest rate, investing will likely lead to a higher net worth over time. However, paying off debt provides a guaranteed, risk-free return equal to the interest rate, which can provide significant peace of mind.
What is the difference between the avalanche and snowball debt payoff methods?
The 'avalanche' method involves paying off your highest-interest debt first, which is mathematically the most efficient way to save money on interest. The 'snowball' method involves paying off your smallest debts first, regardless of interest rate, to build momentum and motivation. This calculator primarily models the financial impact, which is more aligned with the avalanche approach.
What is 'opportunity cost' in this context?
Opportunity cost is the potential gain you miss out on when you choose one option over another. When you choose to pay off debt, your opportunity cost is the potential return you could have earned by investing that money instead. This calculator is designed to help you visualize that opportunity cost.
What about taxes?
This is an important consideration. Investment returns are often subject to capital gains taxes, which can reduce your net return. On the other hand, some debt interest (like mortgages) can be tax-deductible, which reduces the effective interest rate. For simplicity, this calculator uses pre-tax numbers, but it's important to factor in your personal tax situation.