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Pay Off Debt or Invest?

If prioritizing whether to pay off debt or invest, it doesn’t have to be so black and white. A hybrid financial approach can help you work toward both financial goals simultaneously. 

January 12, 2022

To pay off debt or to invest. That’s the common question. But, the answer depends on your one-of-a-kind financial situation. Having debt of any kind can be worrisome, and knowing when it’s wise to pay off debt or invest or when it’s okay to do both, can make things trickier. 

Thinking it out starts with one simple question: 

Should you begin saving money and put off debt payoff, or prioritize paying off debt and delay saving and investing? 

Either way, there are successful debt management strategies that let you invest in your financial future at the same time. It’s all about striking a balance that works for you. 

Should I invest or pay off debt?

When it comes to paying off debt vs. investing, one widely accepted guideline to go by is: if you can earn more interest on your investments than the amount your debts are costing you, it’s more sensible to invest. 

For example, if you’re a homeowner with a mortgage interest rate of 4% and your stock market index fund is returning at an annual rate of 10%, investing extra money in your index fund will put more cash in your pocket over time. That said, if you have debt on a credit card with a 25% interest rate, it will make more sense to pay off the high-interest credit card over-investing in the index fund. Of course, make sure to contact your financial advisor or a financial professional for guidance on this topic. 

Can I invest and pay off debt at the same time?

If you’re prioritizing whether to pay off debt or invest, it doesn’t have to be so black and white. A hybrid financial approach can help you work toward both financial goals simultaneously. 

By creating a budget, you can better visualize exactly how much funds are left on the table each month and split that amount between your two goals: paying off debt and saving for the future. 

Perhaps, with $300 left over after expenses, you can put $150 toward paying off credit card debt or student loans and the other $150 toward your retirement fund. It might take a little bit longer to reach your individual goals, but you’ll continuously improve your financial big picture. 

Should I pay off debt or save?

In life and finances, unexpected plot twists are bound to arise. That’s why, no matter how enthusiastic you are about paying off your debt, it’s important to set aside some emergency savings in the event of an unexpected expense. 

Having a dedicated savings fund is essential, whether it’s the sudden loss of a job, a medical emergency, or a major home repair you weren’t prepared to make. It helps you avoid taking out a personal loan or hitting up a high-interest credit card to cover the upfront costs. This can only stand to spike further debt and set you back even further. 

Once you’ve created your budget, it’s a solid idea to have six months’ worth of expenses stored up. This can be tricky if you’re saddled with student loans or credit card debt, so aiming for three months’ worth is better than nothing. You can always shift your attention back to your emergency savings once you’ve chipped away at your debts. A high-interest savings account is one way to grow your emergency fund while paying off debt at the same time. 

Should I pay off student loans or invest?

According to, roughly 42.9 million Americans owe an average of $37,105 in federal student loans, with over $1.75 trillion in total student loan debt in the U.S. alone. So, if you’re struggling with student loan debt, know that you’re not alone. 


Deciding whether to pay those student loans down or start investing in your future can be a tough call to make. There’s no black or white answer here, either, but some scenarios that call for repaying your student loans before investing money include:  

  • If your student loans have high-interest rates. Certain student loans can come with high-interest rates. Private student loan rates vary by lender, but some have annual percentage rates (APRs) as high as 12.99%. Depending on how much debt you have and how high your student loan interest rates are, it might be wise to tackle high interest debt before making new investments. 

  • If your student loans have delinquencies. Having a past due balance can affect your credit score for years to come. That’s why, if there are any delinquencies in your loan debt or you have accounts in collection, it’s important to prioritize paying off those loans before investing. 

  • If your student loans are variable. If you’re working with a federal student loan like 91.9% of other borrowers, your interest rates are fixed, meaning the rates stay the same for the life of the loan. But, if you have private loans with variable rates, they could increase substantially over time. Paying variable loans off quickly can help you avoid dealing with market fluctuations and save you money over time. 

  • If your student loans stress you out. If your student loan debt is keeping you up at night, that may be enough of a reason to prioritize paying it down over investing in the future. Sometimes, you can’t put a price tag on peace of mind.

On the flip side, here are some situations where prioritizing your investments may be wise: 

  • If your student loans have low interest rates. Start by comparing your student loan’s interest rate with your expected investment returns. The current interest rate for federal student loans is 2.75%, so, if you have a federal student loan, your expected investment return rates may outpace your student loan’s interest rate. If that’s the case, it would make more sense to invest while making minimum monthly payments on the debt.

  • If you have access to employer matching contributions. According to Vanguard’s 2021 How America Saves report, 59% of employers offer an immediate employer matching contribution to their employee’s retirement plans. If this benefit is available to you, it’s like getting extra money in your retirement investment account just for showing up to work. In this scenario, prioritizing your retirement investments over paying off debt can be a wiser way to go. 

  • You’re behind on building your retirement fund. Around one-quarter of non-retired American adults have no retirement savings, and only 36% of non-retired American adults think their retirement savings are on track. If you feel like you’re behind on building up your retirement savings, you’re in good company. What you can do is start prioritizing saving for retirement so you can take full advantage of compounding interest and reach your retirement goals even faster. 

Which loan should I pay off first?

If you decide to pay down debt, you may be wondering, which loan or credit card should I pay off first

As a general rule of thumb, let your interest rates lead the way. Credit cards tend to have higher interest rates, so it may make more sense to prioritize paying off credit card debt first and foremost, starting with the highest interest rate cards and working your way down. As a plus, this strategy can help you build better credit in the process and save you from interest payments piling up. 

You can approach loan payoff the same way, starting by paying off the loans with the highest APRs or interest rates (like some private student loans, car loans or mortgages), and working your way down to loans with lower interest. Listing out all your loans and lines of credit along with their APRs, interest rates, due dates and balances can help you visualize the highest priorities for paydown before you begin. 

Pick a debt payoff strategy that works for you

If you want to take a step out of your financial past and into your financial future, it’s time to take a debt repayment approach that fits your unique financial goals. You can expedite your debt payoff plan by using repayment strategies like the debt avalanche method, which prioritizes paying down debts with the highest interest rates, or the debt snowball method, which prioritizes paying off debts with the lowest balances.

Whichever payoff strategy you choose, with Tally†, you can tackle debt on your own terms. That means less time wondering where to start, and more time investing in the next chapter of your life. 

​​†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.