On this page
What's next
Earn a high-yield savings rate with JG Wentworth Debt Relief
When faced with extra money each month, many people struggle with a crucial financial decision: should you prioritize paying down debt or invest those funds for the future? This question doesn’t have a one-size-fits-all answer, as the optimal choice depends on your unique financial situation, the types of debt you carry, your investment options, and your personal goals.
At its core, the debt-versus-invest question is about comparing potential returns. When you pay down debt, you’re essentially earning a “return” equal to the interest rate you avoid paying. When you invest, you’re aiming for a return that may be higher or lower than your debt interest rate.
Let’s go over some of the pros and cons when it comes to this financial dilemma so you can make an informed decision…
The mathematical perspective
From a purely mathematical standpoint:
- If your debt’s interest rate is higher than your expected investment returns, paying down debt first typically makes more sense.
- If your expected investment returns exceed your debt’s interest rate, investing might be the better option.
However, this simplified calculation doesn’t account for many real-world factors that should influence your decision.
When to prioritize paying down debt
These are some of the more common reasons why you would want to focus on your debt before investing:
- High-interest debt
High-interest debt is usually the first priority to address. Credit cards often carry interest rates of 15-25% or higher, which significantly exceeds the average long-term investment return of about 7-10% in the stock market. Paying down high-interest debt provides a guaranteed “return” by avoiding these substantial interest costs.
- Financial stress
If your debt burden causes significant anxiety or keeps you up at night, prioritizing debt reduction can provide emotional benefits that transcend pure mathematical calculations. Financial peace of mind has considerable value that shouldn’t be overlooked.
- Credit score
If high debt utilization is negatively impacting your credit score, reducing that debt can improve your financial options in the future, potentially leading to lower interest rates on future loans and better financial opportunities.
- Variable rate debt
If you have variable-rate debt during a period of rising interest rates, eliminating that debt shields you from the risk of increasing payment obligations.
When to prioritize investing
Conversely, there are circumstances in which investing your money might make more sense than focusing on your debt:
- Retirement accounts with employer match
If your employer offers a 401(k) match, this represents an immediate 50-100% return on your contribution (depending on the matching formula). This exceptional return typically outperforms even high-interest debt repayment.
- Low-interest debt
If you have low-interest debt – particularly tax-deductible debt like a mortgage – the real cost of this debt may be significantly lower than potential investment returns. Mortgage rates around 3-4% (after tax considerations) compare favorably to long-term stock market returns.
- Long time horizon
The longer your investment time horizon, the more you benefit from compound growth. Starting to invest early can significantly increase your wealth over decades, even if that means maintaining some low-interest debt longer.
- Tax-advantaged investment opportunities
Some investment vehicles offer tax benefits that can effectively boost your returns. Maximizing contributions to accounts like Roth IRAs, HSAs, or 529 plans might make sense even while carrying some debt.
Take your next step towards being debt-free
"*" indicates required fields
A balanced approach: The best of both worlds
For many people, the optimal approach isn’t an all-or-nothing decision but rather a balanced strategy:
- Create an emergency fund first
Before aggressively paying down debt or investing, establish an emergency fund covering 3-6 months of essential expenses. This prevents you from accumulating new high-interest debt when unexpected expenses arise.
- Capture free money
Always contribute enough to your employer-sponsored retirement plan to receive the full employer match.
- Eliminate high-interest debt
Pay off debt with interest rates above 6-8% (credit cards, personal loans, private student loans) as quickly as possible.
- Balance lower-interest debt repayment with investing
For lower-interest debts, consider making regular payments while simultaneously directing additional funds toward investments. This hybrid approach allows you to reduce debt while still benefiting from compound growth.
Considering your personal financial situation
The right balance ultimately depends on several personal factors:
- Age and time horizon: Younger individuals with decades until retirement may benefit more from early investing due to compound growth, while those closer to retirement might prioritize becoming debt-free.
- Job security: Those with unstable income sources might prioritize debt reduction to decrease monthly obligations, creating more financial flexibility during potential income disruptions.
- Risk tolerance: Your comfort with market volatility matters. Some people sleep better knowing they’ve reduced their debt obligations, even if mathematically they might come out ahead by investing.
- Liquidity needs: Investments typically provide better liquidity than paying down debt. Once you make extra payments toward debt, accessing that money again usually requires taking on new debt.
The bottom line
The debt-versus-invest question rarely has a simple answer, and the right approach may change as your financial situation evolves. By understanding the mathematical, practical, and psychological factors at play, you can make informed decisions that align with both your financial goals and personal values.
Remember that consistency often matters more than perfect optimization. Whether you choose to focus on debt repayment, investing, or a balanced approach, maintain discipline in your strategy while periodically reassessing as your circumstances change.
There’s always JG Wentworth…
If you have $10,000 or more in unsecured debt there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
About the author
Recommended reading for you
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.