Pay off debt or invest: What should come first?


You know that paying off debt can be a smart money move, but investing can be, too. Which one should you prioritize?

You’re trying to take charge of your money. You want to pay off debt—especially those high-interest credit cards and loans. But you know it’s also important to invest and grow your nest egg. So what do you tackle first? Here are a few tips to help you decide.

First, reflect on your values.

Before you choose whether to eliminate debt or invest, picture yourself 10 years from now. Then, 40 years from now. What does each moment look like? Thinking about the things you hope to achieve in the future can help you better understand your priorities now.

Managing your money with purpose gives you a chance to experience more of what makes you feel great—like a greater sense of peace of mind and independence. Getting clear on your values and purpose can help guide you toward a life you really love.

Take a look at your financial situation.
There’s no one-size-fits-all answer for setting your money priorities. It’s best to review your situation before deciding on your next move.

Debt-to-income ratio – First, determine if your debt is at a manageable level. Do you know your debt-to-income (DTI) ratio? To calculate it, add up all your monthly debt payments (like your rent or mortgage, credit cards, car payments, or other loans), and divide that number by your monthly gross income—that’s your income before taxes and other deductions.

Some experts recommend your debt-to-income ratio be no more than 36%—but lower, if possible.Disclosure 1 If it’s above that, you might have your answer: Work on paying your debt.

Interest rates – Another reason to prioritize debt repayment is if you have high-interest debt, meaning 6% interest or more. Interest can cost you a lot over time, so a quick repayment timeline can help you save hundreds—even thousands. If you have high-interest credit card debt, this credit card payoff calculator can help you get an idea of how long it’ll take to pay it off.

Retirement savings – Once you’ve checked in on your debt, take a look at your investments. Some experts recommend you have three times your annual salary saved in your retirement account by the time you’re 40.Disclosure 2 Are you closing in on this goal? If you’re on track, consider focusing on your low-interest debts. But if you’re a bit behind, challenge yourself to put a little more toward retirement each month. Even an additional one or two percent of each paycheck can make a big difference.

Read more: Debt versus savings calculator

Calculate-your debt-to-income level

Monthly debt payments


Monthly gross income


Your DTI

After looking at your numbers, it’s up to you to decide which goal to pursue first. But if you’re still not sure or you want an expert opinion, consider talking with a financial advisor or counselor.

Put your money where your mind is.

Beyond the financial aspects, also consider your peace of mind. When you think about debt and your investments, how do you feel? “Ask yourself what is going to bring the most happiness in the long term and make decisions from that perspective,” suggests Bright Dickson, happiness expert at Truist.

Read more: Create a spending plan for what matters most

Does it make you uncomfortable to have debt—even if it’s considered “good,” low-interest debt? Then put your efforts into getting rid of it with the snowball or avalanche methods.

Or, do you feel comfortable with your current debt level and like the idea of saving more for future you? Then you might want to concentrate more on your investments (while still chipping away at your debt with regular payments, of course).

“Ask yourself what is going to bring the most happiness in the long term and make decisions from that perspective.” — Bright Dickson, happiness expert at Truist

Also, look into nonretirement investing, if you haven’t already. If your debt is low-interest and you have the extra funds to invest, you could try an S&P 500 index fund. Although the market fluctuates, the S&P 500’s average annual returns have been around 12.39% over the past decade.Disclosure 3 You don’t get the same tax breaks that you do with a retirement fund (since you have to pay taxes on your gains), but if the return rate from your investments is larger than what you’re paying on debt, it may be more logical to invest. Then you might even be able to pay off your debt with your earnings!

Plus, investing in nonretirement accounts can potentially help you with other goals—like buying a home or a new car, or even retiring early, since you can withdraw from a brokerage account without the penalties or restrictions that come with withdrawing from your 401(k) or individual retirement account (IRA).

Try this tool: Retirement savings calculator

And remember: No matter which money matter you’re more focused on, anxiety is a normal emotion that most people will experience. Dickson suggests taking action on your debt, your investments, or both. Doing something about the source of the anxiety is one of the best ways to overcome it.

Quick tips for doing both at once
If you’re looking for a way to pay down your debt and invest at the same time without too much emphasis on one or the other, here are some ideas.

  • Pay at least the minimum payments on your debt each month—but more if you can swing it.
  • Invest at least as much as your employer match in your 401(k), if it’s offered. If they match up to 4%, invest at least 4% of each paycheck.
  • Make both automatic. Set up automatic monthly bill pay or auto-draft for your debts, and have your employer divert a certain percentage of each paycheck to your retirement account.

Ultimately, you can pay off debt and invest at the same time—but keep your short- and long-term goals in mind as you decide which to prioritize. And no matter which route you go, be sure to budget for your happiness now—like buying things that truly bring you joy and experiences you’ll remember for years to come. 

This content does not constitute legal, tax, accounting, financial, investment, or mental health advice. You are encouraged to consult with competent legal, tax, accounting, financial, investment, or mental health professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.