When you get to a place financially where you can begin to start saving rather than living paycheck to paycheck, a big question often comes up: Should I pay off my debt or invest in the stock market? There’s no simple answer, but there’s a rule of thumb that can help you decide what to do with this money to have the best financial outcome in the long run.
Video
When it’s okay to wait to pay off debt
The simple math behind paying off debt versus investing.
Coleman Lowndes was a lead producer who has covered history, culture, and photography since joining the Vox video team in 2017.
The first place to look is the interest rate on your debt and see if it’s below 7 percent, the rate of return you can conservatively expect from investing in an index fund, like the S&P 500. If your debt — like a mortgage or a student loan — falls below 7 percent, it is usually mathematically more beneficial to invest in the stock market while you pay down the debt by its minimum payments. The logic being that you’ll likely earn more interest by investing than your debt will accrue in that time.
Higher interest rate debt, like credit card debt, should almost always be eliminated as soon as possible, since you are statistically unlikely to see a rate of return from investing past 7 to 10 percent annually. And of course, investing always comes with risk. So the most secure bet is always to work toward being debt-free.
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