Pay off debt vs. invest.

In plain English

This is the question of what to do with money left over after the essentials: put it toward a debt balance or into investments. The standard framing lines up two numbers. Paying down a debt earns you a guaranteed return equal to that debt's interest rate, because every dollar of balance gone is interest you will never pay. Investing offers a return that is potentially higher over long periods but is uncertain and can be negative in any given year. So a high-rate debt, like a card at 22 percent, sets a high guaranteed bar that investment returns are unlikely to clear reliably, while a low-rate debt, like some student loans or a mortgage, sets a lower bar. People typically weigh the certainty of the debt's rate against the higher-but-uncertain long-run return of investing, and also against non-math factors like how much the debt weighs on them.

01Why it matters

The gap between a debt's rate and an investment's expected return can run to thousands of dollars over years, and the two sides differ in certainty as much as in size, so seeing both numbers, guaranteed rate versus uncertain return, is what the comparison is for.

02The math, step by step

Suppose you have 300 dollars a month spare and a card balance at 22 percent. Sending it to the card earns a guaranteed 22 percent return in avoided interest. A broad stock investment might average less than that over the long run and could lose money in a bad year, so the guaranteed 22 percent is a high bar. Now swap the card for a 4 percent student loan: the guaranteed bar drops to 4 percent, and the uncertain long-run investment return looks different against it. Same decision, opposite-looking math, driven entirely by the debt's rate.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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