How to Interpret The Results
This calculator is designed to end the debate between reaching debt freedom and building wealth through compound growth. It directly compares the financial outcome of two powerful strategies over a 10-year period, giving you a clear, mathematical winner based on your personal numbers.
Strategy 1: The Guaranteed Return of Paying Debt
Choosing to pay down debt is essentially locking in a guaranteed, risk-free return on your money equal to your loan's interest rate. For high-interest debt like credit cards (often 15-25%), this is almost always the unbeatable choice. Wiping out a 20% APR credit card is a 20% return that no investment can safely promise. This path leads to reduced stress, improved cash flow, and a stronger financial foundation.
Strategy 2: The Wealth-Building Power of Investing
If your debt carries a low interest rate (like a mortgage at 3-6% or some student loans), the math often favors investing. The stock market's historical average return is around 8-10%. By investing your extra cash, your money has the potential to grow much faster than your debt's interest, creating a positive "spread" that accelerates your net worth. This is the strategy that leverages time and compound interest to build significant long-term wealth.
Frequently Asked Questions (FAQ)
Is it better to pay off all debt before investing?
Not always. It's almost always better to pay off high-interest debt (like credit cards) before investing. However, for low-interest debt (like a mortgage), it can be mathematically better to invest, as market returns may outpace the debt's interest rate.
What is a good rule of thumb for debt vs. investing?
A common rule of thumb is to compare your debt's interest rate to your expected investment return. If the debt's interest rate is higher (e.g., 7% or more), prioritize paying it off. If your expected investment return is significantly higher, investing may be the better choice.
Should I invest if I have student loans?
This depends on the student loan interest rate. Federal student loans often have lower, fixed rates that may make investing a better long-term strategy. High-interest private student loans should often be paid down more aggressively. Use our calculator to run your specific numbers.