When to Invest Instead of Paying Off Debt

Paying off debt feels amazing. That sense of freedom when you finally clear a balance is hard to describe, and it’s one of the most motivating parts of personal finance. But sometimes what feels best emotionally isn’t always the best financial move. If you’re sitting on low-interest debt like a mortgage or student loan, you might actually be better off keeping it and investing your money instead. The math can be shocking once you see how much long-term investing can grow compared to paying off cheap debt early.

Key takeaways:

• High-interest debt should always be paid off first before you start investing.
• Low-interest debt, like a 3% mortgage or 4% student loan, can be worth keeping while you invest.
• Long-term market growth often beats what you’d save by paying low-interest loans off early.
• Paying off debt can bring peace of mind, but investing builds long-term wealth faster.

Start by separating good debt from bad debt

Before deciding whether to invest or pay off debt, you need to understand the difference between good and bad debt. Good debt usually helps you build wealth or increase your future income. This includes things like a mortgage, business loan, or education debt. Bad debt, on the other hand, drains your money and doesn’t give anything back. Think credit cards or personal loans with double-digit interest rates.

If you’re dealing with high-interest credit card balances or personal loans, that’s your first priority. Paying off debt that costs you 20% interest will always outperform any investment you could safely make. But if your only remaining debts are low-interest ones, then you can start looking at what the numbers say about investing instead.

Why high-interest debt always comes first

It’s easy to get distracted by the potential of investing, but high-interest debt is a guaranteed loss. If you’re paying 22% interest on a credit card while your investments return 8% a year, you’re still losing ground every single month. Eliminating high-interest debt gives you an immediate, risk-free return. Once that’s gone, your money can finally start working for you instead of against you.

When investing can make more sense

Once you’re free from expensive debt, the real question begins. If you have extra money and your remaining debt is under roughly 5% interest, you can often earn more by investing that money instead of paying the debt off early. The stock market historically averages around 10 to 11 percent annual returns over the long term, so it’s easy to see how compounding growth can outpace what you’d save by paying off low-interest loans.

Let’s look at a simple example that shows just how powerful this can be.

Example: pay off the house or invest the money?

Imagine you just bought a $300,000 home with a 30-year fixed mortgage at 3% interest. You also have $300,000 in cash sitting in your account. You could use that money to pay off your home completely, or you could invest it in the market and continue making your monthly mortgage payments.

For this example, we’ll assume you invest the full $300,000 into the S&P 500 through an ETF like VOO, which has averaged about 11% annual returns over the long run.

Scenario	Return Rate	Future Value (30 years)	Mortgage Cost (Interest)	Ending Difference
Pay off the house	3%	$0 invested	$0	$0 (you’re debt-free)
Invest instead	11%	$6,844,000	$455,000	≈ $6.4 million ahead

 

That’s a staggering difference. By keeping your 3% mortgage and investing the cash instead, you would still pay off your house over time, but your investments could grow to well over six million dollars by the end of that same 30-year period. Even after accounting for every single mortgage payment, you’d come out millions ahead.

That’s the power of compounding. It’s not that paying off your home early is a bad idea, but when your investments can grow at triple the rate of your loan interest, it’s worth thinking twice before wiping out that debt just for emotional comfort.

Why peace of mind still matters

Numbers only tell part of the story. There’s a psychological benefit to being debt-free that can’t always be measured in dollars. For some people, the peace of mind and sense of control that comes with eliminating debt is worth more than any potential market gains. I get that feeling completely. When I paid off my last debt years ago, it felt like a huge weight lifted off my shoulders.

But once you experience that sense of control, the next step is learning how to make your money work harder. Carrying a 3% mortgage while earning 10% or more in investments isn’t reckless, but strategic. As long as you stay disciplined and don’t use that debt as an excuse to overspend, you can keep your long-term investments compounding while still managing debt responsibly.

The balanced approach

For most people, the best path lies somewhere in between. You don’t have to choose between investing and paying off debt entirely. You can do both. Paying extra on your mortgage each year or rounding up your student loan payments can shave off years of interest. Meanwhile, continuing to invest monthly into a Roth IRA, 401(k), or index fund keeps your money compounding in the background.

Here’s a simple way to think about it:

• Kill high-interest debt first. Always.
• Make minimums on low-interest debt while investing the difference.
• Take advantage of any employer match in your retirement plan; that’s free money.
• Once your investments are rolling, use extra income or bonuses to chip away at debt faster.

That’s how you balance both peace of mind and long-term growth. You don’t need to live debt-free today to build wealth tomorrow, and you don’t need to ignore your debt just to chase market returns. The middle ground is often the smartest move.

Common mistakes people make

Many people either go all in on one side or the other. They either refuse to invest until every loan is gone, or they ignore their debts while chasing investment returns. Both extremes come with problems. If you wait to invest until you’re debt-free, you lose years of compounding. If you ignore debt completely, interest can quietly eat away at your progress. The goal is balance, not perfection.

Another mistake is underestimating emotional comfort. If staying up at night worrying about your mortgage ruins your peace of mind, then paying it off early could still be the right call. But if you can handle some low-interest debt without stress, investing that extra money could put you far ahead in the long run.

At the end of the day

It’s almost always best to pay off high-interest debt first, but when your loans are low-interest and your investments grow faster, investing can make more sense.

Being debt-free feels great. There’s no denying that. But if you have a mortgage at 3% and the market keeps averaging around 10 or 11%, you might be giving up millions in future growth by rushing to zero. Keeping that debt while investing the difference can be one of the most powerful wealth-building moves you ever make.

Everyone’s comfort level is different. Some people value the peace of owning their home outright, while others see the bigger opportunity in compounding growth. Neither is wrong. The smartest move is to understand the math, listen to your own risk tolerance, and build a plan that fits your life, not just what feels safe in the moment.

If you’re deciding where your money should go next, start by using a debt payoff calculator to see how much faster you can clear balances, and a compound interest calculator to see what your investments could grow into. Once you compare them side by side, the choice often becomes much clearer.