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Decision Engine

Should You Pay Off Debt or Invest?

The Federal Reserve reports the median US credit-card APR has been above 20% for several quarters, while expected long-term US stock returns sit around 7-9% nominal per Vanguard and BlackRock capital market assumptions. Answer six questions about interest rate, debt type, employer match, risk tolerance, time horizon, and emergency fund to see which side the math leans toward for your situation.

Last updated: May 2026

A debt-versus-invest lean is a framework for sequencing spare household cash. Lean Toward Payoff = Higher Interest Rate + No Match Captured + Short Horizon. Median US credit-card APR typically target Below 12% (subsidized accounts).

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What is Debt-versus-Invest Lean?

A debt-versus-invest lean is a framework for sequencing spare household cash. It weighs the guaranteed return from paying down debt (equal to the interest rate) against the expected risk-adjusted return from investing, with employer matches, time horizon, and behavioral factors layered on top.

The Formula

Lean Toward Payoff = Higher Interest Rate + No Match Captured + Short Horizon

Capturing the full employer 401(k) match almost always comes first regardless of which side the rest of the framework lands on.

Worked Example

A 35-year-old with $8,000 of credit-card debt at 22% APR, an employer 401(k) match they are fully capturing, a 25-year horizon, and 3 months of emergency savings.

Match: already captured, first priority handled
Rate: 22% on credit card debt, far above expected portfolio return
Type: credit card, the highest-priority debt class
Horizon: long, but the high APR overrides
Emergency fund: starter cushion in place

📌 Lean strongly toward aggressive payoff of the credit-card balance after the match. Once the card is cleared, the framework re-runs in favor of investing.

Why This Matters

Match capture is non-negotiable

Skipping an employer 401(k) match is roughly turning down a 50-100% immediate return on contributed dollars. There is no investing or debt scenario where this is the right call.

High-rate debt usually beats expected returns

Vanguard and BlackRock capital market assumptions place expected long-term US stock returns near 7-9% nominal. Debt above 8-9% interest rate generally beats those returns net of taxes, making payoff the higher-confidence choice.

Common Mistakes

❌ Treating all debt the same

A 3% mortgage and a 22% credit card are not the same problem. Lumping them together masks the high-interest balance where action matters most.

❌ Investing aggressively with no cushion

Without 1-3 months of emergency savings, an unexpected expense often forces borrowing on the very debt you are trying to pay down. Build a starter cushion in parallel.

Industry Benchmarks

Category	Good	Average	Poor
Median US credit-card APR	Below 12% (subsidized accounts)	21-25%	Above 25%
Expected long-term US stock return	8-10% nominal	7-9%	Below 6%
Typical breakeven rate for invest vs pay off	Pay off above 8%	Tie around 6-8%	Invest under 5%

Source: Federal Reserve Consumer Credit G.19 Report and Vanguard Capital Markets Model 2024

Benchmark data sourced from Federal Reserve Consumer Credit G.19 Report and Vanguard Capital Markets Model 2024.

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One of the most common mistakes we see when working with clients: treating all debt the same. A 3% mortgage and a 22% credit card are not the same problem. Lumping them together masks the high-interest balance where action matters most.

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Frequently Asked Questions

Is it always better to pay off debt before investing?

No. The rule of thumb most planners use is: always capture the full employer 401(k) match first because it is roughly a guaranteed 50-100% return on contributed dollars. Beyond the match, debt above about 8-9% interest typically beats expected investment returns net of taxes, while debt under 4-5% often does not. This is general framework guidance, not personalized advice.

Why does the employer 401(k) match come first?

An employer match is essentially deferred compensation contingent on your contribution. Skipping it is the only place in personal finance where you are turning down a guaranteed pay raise. Capturing the match before doing anything else with spare cash is the closest thing to a universal rule across the field.

What about low-interest debt like a mortgage at 3%?

Mortgages and subsidized student loans below the expected long-term portfolio return are usually outpaced by investing the spare cash, particularly across multi-decade horizons. Many households still choose accelerated payoff for behavioral or peace-of-mind reasons; both choices are defensible. A licensed advisor can model your specific situation.

Should I build an emergency fund before either?

Yes, at least a starter cushion. Aggressive payoff or investing without any emergency buffer raises the risk that a surprise expense forces you back into high-interest debt, which undoes the progress. A common sequencing is: capture match, build 1 month cushion, then choose between aggressive payoff and additional investing.

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