How to Interpret The Results
It's one of the most common dilemmas in personal finance: with extra cash on hand, should you pay down your debts faster or invest for the future? The answer isn't always obvious, as it involves a mix of math and psychology. This calculator is designed to focus on the math, giving you a clear comparison of how each strategy could play out over a 10-year period.
Strategy 1: The Guaranteed Return of Paying Off Debt
When you pay extra on a loan, you are essentially earning a "return" on that money equal to the loan's interest rate. For example, paying off a credit card with a 22% APR is like getting a guaranteed, risk-free 22% return on your money. No investment can safely and consistently promise that kind of return. This path offers powerful psychological benefits: reduced stress, improved monthly cash flow once the debt is gone, and a stronger financial foundation.
- Best for: High-interest debt like credit cards, personal loans, or high-rate auto loans (generally anything over 7-8%).
- Benefit: Risk-free, guaranteed financial progress.
Strategy 2: The Wealth-Building Power of Investing
If your debt has a relatively low interest rate, the math may favor investing. The long-term historical average return of the stock market (like the S&P 500) is around 10%. If your mortgage is at 4% and you can reasonably expect to earn 8-10% in the market over the long term, investing the extra money creates a positive "spread." This difference between your investment gains and your debt interest is how you can accelerate the growth of your net worth, leveraging time and the power of compound interest.
- Best for: Low-interest debt like mortgages, federal student loans, or low-rate auto loans (generally anything under 5-6%).
- Benefit: Potential for significantly higher long-term wealth, though it comes with market risk.
The "Why" Behind the Numbers
Our calculator runs two scenarios simultaneously with your extra monthly payment over a 10-year period (120 months):
- The Debt Payoff Scenario: It calculates how much interest you would save by paying off the debt aggressively. The "value" in this scenario is the guaranteed money you didn't have to pay the bank.
- The Investing Scenario: It calculates how much a portfolio could grow to by investing that extra monthly payment, using a standard compound interest formula based on your expected return.
The tool then shows you which outcome is mathematically larger, providing a data-driven starting point for your decision. While the numbers are a powerful guide, always consider your personal risk tolerance and financial goals when making a final choice.
