Should I pay off debt or invest?

Compare the debt's interest rate to what you can expect from investing after costs and tax — but weight the debt more heavily, because its return is certain and the market's is not.

Paying down a debt returns exactly its interest rate, guaranteed, with no VolatilityHow much returns scatter around their average, usually measured as a standard deviation. It is a proxy for risk rather than risk itself: it treats an unexpected gain and an unexpected loss identically. and no Sequence riskThe risk that returns arrive in an unlucky order. Two retirements with identical average returns can end very differently if one meets its bad years while withdrawals are shrinking the balance.Read the evidence on this →. Investing has a higher Expected returnThe probability-weighted average of what could happen — not a prediction of what will. A strategy can have the higher expected return and still be the wrong choice for someone who cannot survive its bad tail. and a wide distribution around it. Comparing the two as though 6% of debt and 7% of expected equity return were the same number is the standard mistake: they are not the same kind of number.

In practice the ordering falls out cleanly. Anything above roughly 8-10% is a better use of money than an expected market return, because you would be taking real risk to earn a premium you can have for free. Anything below about 4% is usually worth carrying while you invest. In between is genuinely a judgement call, and the honest answer depends on how much the debt bothers you.

One exception outranks the entire comparison: an Employer matchMoney your employer adds to your plan in proportion to what you contribute, typically up to a few percent of salary. Declining it is declining part of your stated compensation.Read the evidence on this →. Collecting it is an immediate return of 50% or 100% on the money, which no debt rate competes with.

When the answer is different

Tax changes the comparison in both directions — deductible interest lowers the debt's real cost, and a tax-advantaged account raises the investment's net return.
If the debt is on a card whose limit you would use again once cleared, paying it off does not settle the behaviour that created it.

Put your own numbers to it

Every answer here is general. These are not.

Debt vs invest
Should this money clear a debt or buy an index fund?
Debt payoff planner
How long until I am debt free, and what does the order cost me?
401(k) optimizer
Am I leaving employer money on the table?

The research this rests on

Each note states its claim, rates how strong the evidence actually is, and lists the conditions under which it fails.

Clearing debt is a guaranteed return; investing is not
Paying down a debt returns its interest rate with certainty, which should be compared to expected investment returns on a risk-adjusted basis, not a raw one. (strong)
Unclaimed employer matches are the clearest mistake in personal finance
A meaningful share of eligible employees fail to contribute enough to collect the full employer match, forgoing money with no offsetting cost. (strong)
Tax drag is a fee you can often remove entirely
Holding the same investment inside a tax-advantaged account rather than a taxable one raises net returns with no additional risk taken. (strong)

Terms used on this page

The same definitions the underlined words open, written out so nothing on this page depends on a click.

Employer match: Money your employer adds to your plan in proportion to what you contribute, typically up to a few percent of salary. Declining it is declining part of your stated compensation. Evidence →
Volatility: How much returns scatter around their average, usually measured as a standard deviation. It is a proxy for risk rather than risk itself: it treats an unexpected gain and an unexpected loss identically.
Sequence risk: The risk that returns arrive in an unlucky order. Two retirements with identical average returns can end very differently if one meets its bad years while withdrawals are shrinking the balance. Evidence →
Expected return: The probability-weighted average of what could happen — not a prediction of what will. A strategy can have the higher expected return and still be the wrong choice for someone who cannot survive its bad tail.