Should I Pay Off Debt or Invest My Extra Cash?

The decision to pay off debt or invest comes down to one main factor: the numbers. Specifically, the difference between the interest rate on your debt and the return you expect from your investments.

Take this example: If you have credit card debt at 28% interest, but your investments are earning around 8%, you’re losing 20% every year by not paying off that debt. Think about it—no investment is going to consistently beat that 28% interest rate. In this case, paying off the debt is the smartest choice because you’re guaranteed to save more money by eliminating that high-interest charge.

However, if your debt is at a lower rate, like a mortgage or student loan at 3-5%, investing might make more sense. Over time, the stock market typically earns around 7-10%, so if you’re only paying 3% on your debt, you could potentially earn more by investing the extra cash. But remember, investments come with risk, and there are no guarantees.

In summary:

• Credit card debt at 28%? Pay it off—nothing beats eliminating that high interest.

• Low-interest debt (3-5%)? Consider investing if you’re comfortable with the risk and have an emergency fund.

Each situation is unique, so running the numbers or talking to your CPA can help you make the best decision for your financial future.