If you have extra cash each month, should you pay down debt… or invest it? The math can help point the way, but personal comfort matters too.
🔢 The Math
Imagine you’re deciding between:
- Paying extra toward a 6% student loan
- Or investing in a brokerage account expected to return 7% annually
Seems like investing wins, right?
Maybe. But let’s adjust for taxes. If that 7% return is in a taxable account, you might only net ~5.5% after capital gains taxes. In that case, the 6% loan payoff becomes the better deal.
Now flip it: if your loan is at 3.5% and your investment is in a Roth IRA expected to return 7%, the after-tax spread is wider. Investing wins mathematically in that case.
🧠 The Analogy: Leaks in the Bucket
Think of your financial life as a water bucket:
- Debt is a leak.
- Investing is pouring more water in from a hose.
If the leak is big (high interest rate), patching it (paying off debt) is the priority. If the leak is small and the hose is strong (high investment return), then investing might fill your bucket faster—even with some drips.
But if the hose might sputter (markets can underperform), you may prefer to plug the leak first—even if it’s small.
❤️ The Real Answer: It Depends
What’s mathematically optimal doesn’t mean it’s always personally optimal.
If the difference in interest rate vs. expected return is small, the decision likely won’t make or break your finances. Some people feel great watching debt disappear, and that peace of mind is worth something too.
📌 Here’s a good framework:
- Debt over 6%? Strong case for paying it down aggressively.
- Debt under 4%? Consider investing if you have a strong emergency fund and long time horizon.
- Between 4%–6%? It’s a toss-up—run the numbers, then go with your gut.
Did You Know?
Your employer sponsors this financial wellness benefit from Francis. The benefit connects you with down-to-earth financial planners who educate and advise on any money matters…without the sales pitch. We are exclusively engaged by employers like yours and have no investment products to sell, so you can feel confident that you will always receive objective advice.
Your financial planner will help you set priorities and achieve your money goals, without judgment or financial jargon. Know that all discussions are kept strictly confidential. This service is offered as an employee benefit with no per-session co-pays, so you can meet with a financial planner as often as you wish. Services are paid by your retirement plan or your employer.
Connecting with a financial planner is easy! Here’s how:
- Visit FrancisWay.com > Services > Participant Portal
- Call (866) 232-6457
Download the free mobile app (Search for Francis LLC)
