Should I pay off debt or invest?

Most young families have several financial goals they would like to attain, from paying off student loans and credit card debt to saving for a home, nurturing children, and saving for retirement. While these are all great things to focus on, debt can often feel like an obstacle keeping you from attaining your other goals.

Two people sitting on a couch reviewing paperwork.

Paying off debt vs. investing

You may feel tempted to pay off your debt as quickly as possible, if only to cut down the amount you’re paying in interest. If you fail to save or invest during this time period, however, you may have a net worth of zero when you eventually are free of debt. So, what’s the best solution? As usual, it depends on your individual circumstances. Here are some things you should consider:

  • How much interest are you paying on your debt?
  • What is your ability to stay on top of debt payments?
  • How close are you to retirement?


The pros of paying off debt first

Total household debt is on the rise, with the average U.S. household owing a total of $143,636 at the end of the first quarter of 2023.1 That’s a lot of debt, and in a rising interest rate environment, that can mean even more interest.

Credit cards often carry the highest interest rates, so if you’re carrying a lot of credit card debt from month to month, you should focus on paying that off first. It’s not unheard of for credit card interest rates to hover around 20%, an amount that far exceeds average returns in the market. So, unless you’re a brilliant investor, you will be losing more to interest payments than you would be gaining through investing.


Improving your credit score

Carrying a lot of debt can affect your credit score, which can lead to wider-ranging consequences than you might think. Even if you haven’t maxed out your credit cards, keeping a high credit utilization ratio (the money you owe on your credit cards, divided by your total credit card limit) can have a negative effect on your credit score.

A bad credit score can lead to higher interest rates and fewer loan options. It can also make it harder to find housing. Experian, one of the three big credit reporting agencies recommends keeping your credit utilization ratio at 30% or lower.2


Increasing your cash flow

Paying off debt means you'll have more money available to put toward other financial goals, such as investing, adding to your emergency fund, or saving for retirement. You can also use the extra money to pay for your everyday needs, thus limiting the amount of credit card debt you rack up in the future.


Reduced stress and anxiety

Having debt can be a significant source of stress and anxiety, which can have a negative effect on all aspects of life. Paying off debt can give you peace of mind and allow you to focus on other financial, personal, and family goals.

If you’re having trouble getting a handle on your debt, one strategy that experts recommend is the debt snowball method. With this strategy, you focus on paying off credit card debt, tackling the lowest balance first, while making required minimum payments on the other credit cards. Once you finish paying off one card, move on to the one with the next lowest balance, and so on, until all cards have been paid off. One study by the Harvard Business Review found that consumers who used this method paid down their debt 15% faster than those who made their debt payments in equal amounts.3 For more information about paying off credit card debt, read this article.


What are the pros of investing for retirement first?

Investing is an essential part of building wealth over time. When you invest, your money has the potential to grow and generate income. While you typically want to retire all of your debts before retirement, not all debt is the same. For instance, you may still be paying down your mortgage as you head into retirement. A home, however, is an asset that can appreciate in value as well as provide generational wealth.


Compound interest

While you want to eliminate debt, being adequately prepared for retirement means you should start investing as early as possible to take advantage of compounding interest. The compounding of interest as time passes is a powerful force that can help your investments grow exponentially over time. The longer you invest, the more time your money has to compound.


Potential for higher returns

Investing has the potential to generate higher returns than paying off debt. This is especially true over the long term. However, there are risks when you invest, and high returns are not guaranteed. That’s why experts suggest starting to invest early on, so you have a long enough time line to weather market downturns.



Investing allows you to diversify your portfolio and spread your risk across different asset classes. While there is no guarantee that diversification assures a profit or protects against loss, this strategy can help mitigate risk and increase the potential for returns. However, it’s important to have a strategy that’s aligned with your goals and your retirement time line. A financial services professional can help determine which investment products are right for you based on your circumstances, so don’t hesitate to reach out for help.


Is a hybrid approach the best solution?

A hybrid approach that balances paying off debt and investing can be an effective way to achieve both short-term and long-term financial goals. By putting some money into savings while you simultaneously work to pay off debt, you can make progress toward important financial goals (like saving for retirement through your company’s 401(k) plan). In fact, this hybrid approach is the method most experts recommend. It also gives you more flexibility and allows you to adjust your strategy as your financial situation changes. Here are some ways you can be more retirement-ready as you pay down your debt.


Establish an emergency fund

Start an emergency savings fund that can cover your bills for at least six months. Life is unpredictable, and should you be hit with an unexpected expense or loss of income, the emergency fund can help you avoid going even further into debt.


Don’t forget about insurance

Imagine if you were to become disabled and no longer able to work, or if your spouse passed away unexpectedly. Would you be prepared? The costs of dealing with these situations without proper protection and income strategies would be far greater than the cost of paying interest on your debt for a few extra months. Speak with a financial professional to determine which life insurance products best fit your needs.


Consider your debt relief options

If you feel that you still can’t get a handle on your debt, you can look into establishing a debt management plan. A debt management counselor can help negotiate lower monthly payments and reduced interest rates to help you pay back your creditors more easily. You can use the extra money to invest in your retirement, pay your insurance premiums, or add to your emergency fund.

Whether you should pay off debt first, invest first, or take a hybrid approach depends on your individual situation, the kind of debt you owe, and your financial goals. While focusing on paying off high-interest credit card debt should be a priority, a hybrid strategy helps to ensure that paying down your debts doesn't come at the expense of your future retirement.

Want to learn more about investing and financial strategies?

A NYLIFE Securities Registered Representative can help determine what’s right for you.

1Alina Comoreanu, “Household Debt Report,” WalletHub, May 15, 2023.

2Charles Wallace, “What Is Credit Utilization?”

3Remi Trudel, “Research: The Best Strategy for Paying Off Credit Card Debt,” Harvard Business Review, December 27, 2016.

Investments are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life company.