FINANCIAL FOCUS
Paying off debt vs Investing
In Chapter 1 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we briefly touch on the issue of debt, and its important effect on personal finances.
In this installation of Financial Focus, we will discuss the topic of “Paying off debt vs investing.” As always, we will provide some education and commentary for the inexperienced and/or uninformed.
So which is better? – It depends. There are many factors to consider when attempting to answer this question, including one’s age, employment status/security, amount of debt, types of debt or investments, interest rates or yields attached to debt or investment, self-discipline, credit history, family situation, future goals, and discretionary funds. Let’s break it down and possibly determine what is best for you…
Age, employment, and family situation are always an important factor in deciding whether to pay off outstanding debt or make an investment. Are you just beginning your adult life with your own money to manage, no assets, and a small amount of money, or are you nearing retirement, with a paid-in-full mortgage, a 401k and ample savings? Are you middle-age, married individual, with 2 children in college, half of your mortgage still outstanding, a solid job with benefits, with some stock holdings, or are you a single parent, living in an apartment, with little savings and no investments. These realities can shape your ability to either pay off debt or invest in the first place, and the more difficult the financial condition, the more important this decision may be. In any situation, it is suggested that at least 3-6 months of living expenses is put aside before either of these options is even decided upon.
The next consideration is the type of debt, the balance due, the length allowed to satisfy, and interest rates attached to one’s debt. There are many different types of debt, including lower interest instruments like car loans and mortgages, medium interest level debt, such as student and home equity loans, and larger interest charges that accompany some business loans and credit cards.
Most are aware that one of the main rules of reducing debt is to pay more than the monthly due amount, to save on future interest, but we will focus simply on a decision between investing a certain amount of money, or using it to pay off debt, depending on the individual’s personal finances.
One simple way to calculate the best approach is to simply compare an investment’s expected rate of return (if known), vs the debt’s interest rate. For example, if you’re equity investment distributes a guaranteed 5% return, that is a better avenue than paying off a car loan at 2.1%. Comparing the same investment to a 25% credit card debt, the choice is clearly to pay off (or down) the card, as most investments do not return that amount per year. That approach will work to a point, though the amount of debt plays a large role as well. If that same car loan had a balance of $20,000, and the credit card debt had a balance of $500, it would serve one better to pay extra on the car loan, as it would add up to much more interest paid over the long run.
Another factor to consider is the type of asset under debt or investment. Ask yourself these simple questions before deciding your action…
Will your investment compound and grow over time, with no expiration date?
Many stocks, bonds, CD’s, and money market accounts pay pre-set dividends, that can be re-invested to compound returns over time. For long-term investors, this is a popular avenue to grow wealth, though there is a risk factor with stocks. Any funds (or a portion of) that are not needed in the next 6 months, or later time frame, are often used for this type of investment, including 401k’s, pension funds, and liquid brokerage accounts.
Is the asset sellable after the payments are complete?
Many investments are also considered an asset when they can be re-sold after payments are complete, even when not used for compounding. Most of us know that a motor vehicle, once purchased, immediately starts to depreciate. This “investment” is generally for usage, not for expected future gains (unless the vehicle is a classic), and can become a liability depending on required maintenance, insurance, and taxes, though it may be eligible for resale, to reclaim a portion of the investment. Real estate will generally cost much more than the average investment, but also has usage as a place to reside, and more often than not increases in value, is re-sellable, and offsets some of its interest in tax deductions. Physical investments like precious metals and/or fine art, can increase in value without any “extra work,” though there can be price fluctuation risk.
Are there maintenance fees or obligations that will add to your expense?
Once again, some investments come with more obligations than others, including property tax, upkeep, and a sales representative when buying or selling. Others, like 401k’s, pensions, and Exchange Traded Funds (ETFs) are professionally managed with a built in “maintenance fee” for the service. The amount of maintenance and fees can be sizeable for certain investments, and should be factored in when considering the purchase.
Is the source of income stable?
Another consideration when taking on debt is to determine how secure one’s income source(s) really is/are. One may be able to secure a loan at the present time, but any change in income could strap the borrower to the point of loss or default. It is important to factor in whether you are self-employed, work for an established company, have a low likelihood of layoff, and future job availability and opportunities if conditions change.
Strategies to satisfying debt…
1. Consolidation – One way to reduce debt faster is to bundle all loans together into one single obligation. This will allow for all balances to be combined, with a single interest rate, and one monthly payment. There is an application process similar to that of any loan, but for those with excellent credit, a large amount of interest can be saved.
2. Make extra payments – Whether one has a single loan, or several, paying over the minimum will also save a significant amount of interest over the life of the loan. In the case of real estate, even one full extra payment per year can reduce the life of the loan by several years.
3. Curb spending – Of course, the easiest way to avoid the “debt trap” is to be more frugal and don’t overspend. It is human nature to spend more when you make more, but saving money (and pretending you don’t have it) it an excellent way to remain “above water” with your obligations. It is also much less stressful knowing you have emergency funds no matter the issue.
4. Pay off high interest rates first – as mentioned above, in certain circumstances it is beneficial to erase the higher interest loans first. If that is the approach, it is suggested that the same payment (overage from the satisfied loan) be contributed to the smaller balances, if affordable. Getting used to a certain monthly payment, and maintaining the ability to pay it, is also an excellent approach.
With record amount of debt throughout the world in 2025, the stress factor is at all-time highs. The “average” Joe has a credit score, housing expenses, student loans, and other necessities that can create an overwhelming feeling if not handled correctly. Start early with building up a “slush” fund as a means of “peace of mind” should emergencies arise, and have a plan or budget to follow. Also, do not allow any predatory lending to put you in a bad situation.
Paying off debt is usually the better route before investing, unless there is no concern at all in the ability to pay. Certain investments may assist in paying off such debt, however each individual has their own set of circumstances and should plan accordingly.
For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN, where we provide periodic updates on a variety of topics.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
