Should You Invest or Pay Off Debt First? Here's How to Decide.

It’s one of the most common personal finance questions: Should I invest my extra money or use it to pay off debt? The answer depends on a few key factors—like interest rates, savings goals, and your appetite for risk. Here's how to break it down and make a decision that sets you up for long-term financial health.

Pay Off High-Interest Debt First

Generally speaking, paying off high-interest debt (like credit card debt) should be your top priority. Why? Because the average credit card APR is often 20% or more—much higher than what most investments will return over the same period. If your debt carries an interest rate of 12% or higher, you're better off eliminating that debt before investing.

Rule of thumb: If the interest rate on your debt is higher than the expected return on your investments, pay off the debt first.

Understand Your Leftover Cash

Leftover cash is what’s left after covering your monthly expenses, bills, and minimum debt payments.
Example:

• Monthly income: $4,000
• Bills and expenses: $2,500
• Minimum debt payments: $500
• Leftover cash: $1,000

This leftover amount is what you’ll allocate between debt payoff, saving, and investing.

Build Your Emergency Fund First

Before investing, make sure you have savings in place for emergencies. If an unexpected expense hits and you have no cash cushion, you might fall back on credit cards—undoing your progress.

We recommend saving 3–6 months of expenses in a high-yield savings account (HYSA). These are FDIC-insured, low-risk, and often offer APYs of 0.5% or higher.

Suggested allocation:

• 70–80% of your leftover cash → high-interest debt
• 20–30% → emergency savings
  Once you’ve saved at least 1–2 months of expenses, consider splitting that 20–30% between savings and investing.

Use Auto-Investing Tools to Get Started

If you're new to investing, don’t stress. Auto-investing apps make it super easy. Our top picks include:

• Acorns – Rounds up your purchases and invests the spare change
• Stash – Helps you invest with as little as $5
• Wealthfront / Betterment – Automated portfolios tailored to your risk level

These tools remove the guesswork and help you start small, with low effort.

Paying Down Debt = A Guaranteed Return

Think of paying down debt as a risk-free investment. If your debt has a 15% APR, eliminating that debt gives you the equivalent of a 15% return—with no market volatility.

That’s hard to beat, even in a bull market.

The Bottom Line

1. Figure out your leftover cash after all essentials are covered
2. Use 70–80% of that leftover to aggressively tackle high-interest debt
3. Use the remaining 20–30% to build an emergency fund
   • If you already have 1–2 months saved, start investing
4. Try auto-investing apps like Acorns, Stash, or Betterment to get started
5. For low-interest debt (like federal student loans under 5–6%), consider paying the minimum while investing more

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