Should You Pay Off Debt or Invest?

Many people face a fundamental financial question: when extra cash becomes available, is it better to use it to pay down existing debt or to invest for future growth? The answer depends on a variety of factors, including interest rates, investment returns, risk tolerance, and personal goals. This calculator provides a structured way to evaluate the trade-off by comparing the future value of paying debt versus investing the same monthly amount. All computations occur in your browser, ensuring privacy and instant results.

The core of the comparison relies on compound interest formulas. When you apply extra money to your debt, you effectively earn a return equal to the debt’s interest rate because you avoid paying that interest in the future. Conversely, investing the money offers the potential for growth at the investment’s expected rate. Both scenarios can be represented with MathML using the future value of an annuity formula:

In this expression, represents the monthly contribution, is the monthly interest rate (annual rate divided by twelve), and is the total number of months. The calculator computes two future values: one using the debt interest rate (representing interest saved) and another using the expected investment return. The comparison reveals which strategy yields a higher future value at the end of the chosen time horizon.

Consider an example: you have an extra $200 per month, a credit card balance with an annual percentage rate of 18%, and an investment option expected to earn 7% annually. Over five years, paying down the debt yields a future value of avoided interest that vastly exceeds the potential investment returns. The high cost of credit card interest means that eliminating the debt effectively “earns” you 18% risk-free, which is difficult to match in the stock market. In such cases, paying off the debt is generally the financially sound decision.

However, when debt carries a low interest rate, such as a 3% mortgage, and investment opportunities offer higher expected returns, investing may outperform debt repayment. The calculator reveals this by computing both future values. If the investment value exceeds the interest saved, you may choose to invest, assuming you are comfortable with market risk and have an emergency fund in place. By quantifying both outcomes, the calculator helps remove guesswork and emotional bias from the decision-making process.

The tool also enables sensitivity analysis. By adjusting the time horizon or interest rates, you can see how small changes impact the decision. For example, if you expect investment returns to be lower over the next few years, reducing the investment rate in the calculator might show that paying debt becomes more attractive. Alternatively, extending the time horizon could amplify the benefits of compound investment returns, tipping the scale toward investing even if the debt rate is moderate.

The table below demonstrates outcomes for a $100 monthly contribution across different debt and investment rate combinations over ten years. Values represent the future amount from each strategy:

Debt Rate / Invest Rate	Pay Debt FV ($)	Invest FV ($)
5% / 5%	15,528	15,528
8% / 5%	18,292	15,528
5% / 8%	15,528	18,292
12% / 7%	21,004	17,308
3% / 10%	13,979	20,655

These figures illustrate how dramatic the difference can be. At an 8% debt rate versus a 5% investment return, paying off debt builds the equivalent of $18,292, far surpassing the $15,528 accumulated through investing. Conversely, when the investment return is higher than the debt rate—such as 3% debt versus 10% investment—the investment strategy yields significantly greater wealth.

Yet numbers tell only part of the story. Paying off debt reduces financial risk and improves cash flow by eliminating required payments. This emotional and psychological benefit is difficult to quantify but important to consider. On the other hand, investing while carrying debt can be reasonable if the investment is liquid and accessible for emergencies. The calculator provides the quantitative backdrop, but personal circumstances should guide the final choice.

Some individuals choose a hybrid approach: allocate a portion of the extra money to debt repayment and the rest to investments. This strategy balances risk reduction with wealth building. Though the calculator compares all-or-nothing scenarios, the underlying math can be applied to partial allocations as well. You might run the calculator twice—once with half the contribution amount for each strategy—to visualize the blended outcome.

Another nuance involves tax considerations. Interest on certain debts, like mortgages or student loans, may be tax-deductible, effectively lowering the debt rate. Likewise, investment returns may be subject to taxes, reducing their net benefit. While this calculator uses pre-tax rates for simplicity, users can adjust the input rates to approximate after-tax values, providing a more personalized analysis.

Ultimately, the pay debt versus invest decision is about opportunity cost—the benefits you forgo by choosing one option over the other. By harnessing the power of compound interest formulas and clear input parameters, this calculator empowers you to make an informed choice. Whether you prioritize debt freedom or long-term growth, understanding the numbers behind each path brings you closer to your financial goals.