How to decide whether to pay down debt or invest your money

When you’re bogged down in debt, whether it’s credit cards, loans, or some combination of both, setting aside money to invest can be challenging. It can also feel somewhat counterproductive investing when you’re paying interest on debt.

With household debt in the United States skyrocketing to $16.5 trillion in the third quarter of 2022—which is more than $2 trillion higher than prior to the pandemic in 2019—more than a few people are likely to be facing this dilemma. Does it make more sense to focus on eliminating debt or investing? And under what circumstances should you try and do both at the same time? The answer to those questions won’t be the same for everyone.

How to decide when to pay off debt and when to invest

There are some key considerations to sort through in order to help gauge whether you should focus on tackling your debt or investing—or doing both simultaneously. Navigating this dilemma hinges on such variables as the interest rates on your debts, your ability to stay on top of debt payments and your retirement timeline.

Is your debt high interest credit card debt?

For those who are carrying high-interest credit card debt, it often makes more sense to focus your financial efforts on simply wiping out the debt as quickly as possible, rather than trying to invest, says debt resolution attorney Leslie Tayne, of Tayne Law Group.

“The stock market has historically returned 10% on average, while credit cards have rates that hover around 20%. Unless you aggressively pay down credit card debt first, the math won’t ever work in your favor,” says Tayne.

Tayne’s point is particularly important at a time when interest rates on credit cards have risen precipitously, which has made eliminating credit card debt even more challenging for those who are struggling—especially if you’re only making minimum payments. In 2022, credit card interest rates hit 19.04%, according to Bankrate.com. That’s the highest it’s been since Bankrate started tracking credit card rates in 1985.