Login

New to Benzinga?

Register

Already have an account?

Pay off Debt vs. Invest

Most Americans have some form of debt. From monthly mortgages to the ubiquitous ghost of student loan payments, you’ll be hard-pressed to find anyone who’s totally debt-free.

The decision to invest or pay down debt can feel like a delicate dance. If you ignore your debts, creditors will start tacking interest onto your monthly bills, which can begin a never-ending cycle of minimum payments and interest accumulations. On the other hand, every moment you put off investing can mean missing out on the power of compounding interest.

So, if you have $200 in your pocket, what should you do with it? Put it towards your debt or invest it for the future? Is it better to totally pay off all your debt before you begin investing, or should you only pay the minimum balances on your accounts and put the rest of the money into a retirement account or the stock market?

The answer to these questions will depend on your specific circumstances and the type of debt that you have.

Consideration 1: Your debt type

Believe it or not, some debt can be good. For example, most homeowners have a mortgage payment to cover the cost of their home—however, homes are generally considered to be an appreciating asset, meaning that they rise in value over time and end up worth more than the original value of the mortgage. You can deduct interest paid on your mortgage from your federal taxes up to a certain amount, so there usually isn’t a rush to pay off your mortgage if the payments are manageable and you have a steady stream of income.

Interest on student loans is also tax-deductible up to $2,500, and many creditors offer 0 minimum payment “grace periods” to new graduates that can last anywhere from six to 18 months in order to help you focus on securing employment. To learn more about tax-deductible interests, check out the video featured below:

Some debts have no benefits. For example, credit card debt (especially on credit cards with interest rates above 15 percent) and auto payments have no tax benefits and do nothing more than act as a drain on your finances. If you have either of these types of debt, start by paying them down first before you think about investing.

Consideration 2: Your interest rates

High-interest loans have the potential to trap you in a never-ending circle of debt repayment. If you have high-interest debt, you should focus on repaying this first before you begin investing.

As a general rule, the types of debts that incur high interest include payday loans (which can charge up 400% APR), credit cards with over 10% interest, and buy-here-pay-here auto loans and leases. If you have any of these types of debts hanging over your head, pay them down as quickly as possible.

Consideration 3: Your risk tolerance

Younger investors (those who have more years until retirement) have the benefit of time on their side. If you are in your 20s or 30s, you can shoulder more investment risk, putting your money into mutual funds or stocks that have a greater potential for reward.  Should the market take a dip, you have enough time to ride out low returns until the bull market comes back again.

However, as you approach retirement, you will want to be more conservative with your investments, placing your money into securities that have less potential for payout.

Look more into asset allocation if you need help figuring out how to balance your portfolio. Older investors may want to focus on paying down debts before investing, while younger investors may see more returns thanks to compound interest. 

Consideration 4: Your employment status

If you’re self-employed or if you work part-time, your income can be highly variable. A single lost client or three fewer hours worked a week can seriously impact your ability to pay down debt.

You can manage this risk by focusing on paying debts first before investing. On the other hand, if you’ve been salaried in your position for years and you’re settled and comfortable in your career, you can reliably predict how much money you’ll have coming in each month, and you’re less likely to fall behind on your bills. In this circumstance, it is better to invest first while also managing money to work towards becoming debt-free.

Paying down debt vs. investing: Where to start with each

If you’ve decided you’re better off paying down debt

The best place to begin is by using what’s called the “debt snowball” method of debt reduction. First, lay out all of your debts in front of you and calculate what you owe on each account. Identify the account with the highest outstanding balance and focus on paying as much as you can towards this debt while also paying the minimum balance on all of your accounts—this will help you avoid accruing additional interest on your debts or lowering your credit score.

After your smallest debt has been completely paid off, move onto your second smallest debt, tackling each account in order from least challenging to most challenging. Though some financial experts advise that you should halt all retirement and investing contributions while paying down debt, this “crisis mode” should generally last for no more than two years—beyond this amount of time, you will begin to lose out on the principles of compounding interest. You can see an example of the debt snowball method below:

Debt Snowball
Debt snowball method happens when you pay above your regular payment. Source: https://www.creditmergency.com/does-the-debt-snowball-work/

If you’ve decided to begin investing

A great place to start is with your retirement plan. If your employer offers a 401(k) match program, begin by contributing the maximum maxed percentage to your account each pay period. If you are self-employed or you’ve already maxed out your 401(k) for the year, opening a traditional or Roth IRA is a great way to further solidify your retirement savings.

No clue how to start? Take a look at Benzinga’s round-up of the Best Roth IRA Accounts. Here’s a quick look at our favorites.

Broker Best For Commissions Account Minimum Choose your platform
Ally Investment
  • Active traders
  • Beginners looking to start trading
  • Low fees
$4.95 volume discount available $0
Get started securely through Ally Investment's website
1 Minute Review

If investors are on the hunt for a bargain broker, Ally Invest could be the one. With low commissions across the board, Ally Invest (formerly TradeKing) stops potential investors in their tracks with its especially low mutual fund commissions. Commissions on stocks and ETFs are notoriously inexpensive as well, and for more active traders or those with larger account balances, commissions can dip as low as $3.95 per trade.

Pros
  • Volume discounts available
  • Among the lowest fees in industry
  • Good for every experience level
  • Excellent customer service
Cons
  • Lacks physical locations
Current Promotion

$3.95 per stock trade for Active Traders at Ally Invest

TD Ameritrade
  • Beginner investors
  • Advanced traders
  • Investors who want portfolio-building advice.
$6.95 $0
Get started securely through TD Ameritrade's website
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Pros
  • Superior technology
  • No account minimum balance
  • Excellent customer support
  • Premier data and news partnerships
Cons
  • Slightly higher commissions
  • Can be for more advanced users
Current Promotion

Trade commission–free for 90 days & get up to $2500

eTrade
  • Mobile traders
  • Traders looking for research and data
  • Investors looking for retirement planning guidance
$6.95 for fewer than 30 trades/quarter. $0
Get started securely through eTrade's website
1 Minute Review

E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.

Pros
  • Extensive resources
  • Full banking services
  • Easy-to-use platforms
Cons
  • Limited access to ETrade Pro
  • Higher commissions than discount brokers
Current Promotion

60 days of commission-free trades with deposit of $10,000 or more

Final thoughts

The decision whether to invest or pay down debt first is a personal one. However, regardless of how much debt you’ve accrued, get started investing as early as you’re able.

Even if you aren’t quite ready to jump into investing today, educate yourself by reading up on the domestic and international markets. That can help you make smarter money movements when the time comes.

Want to learn more about investing? Check out Benzinga’s guides on how to figure out if you should pay off your mortgage or invest, the best online brokerages and the best investing books for beginners.

Compare Online Brokers
Broker Commission Account Min Get Started

$6.95 for fewer than 30 trades/quarter. $0 Learn More

Flat-fee pricing: $5 per trade, Per-share pricing: $0.006-$0.01 per share ($1 minimum per trade) based on trading volume, Unbundled pricing: $0.002-$0.01 per share ($0.50-$1 minimum) based on trading volume $5,000 for individual retirement accounts (IRAs) Learn More

$4.95 volume discount available $0 Learn More

Free $0 Learn More

$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available $0 for cash account, or a margin account with $2,000 Learn More