Should I pay off debt or invest?

Paying off a debt earns its interest rate, guaranteed. Stocks have earned about 4.5% a year above inflation over the long run, around 6.6% a year when prices rise 2%, and they guarantee nothing. Credit cards charge 17–22% a year in the US, the UK and the euro area, so clearing one beats any investment you can buy. Most mortgages, car loans and student loans cost between 3.5% and 9%, where it’s a judgement call and either choice is fine.

Paying off debt is an investment with a guaranteed return

Every 100 you pay off a card that charges 20% a year saves you 20 a year in interest, for certain. No fund can promise that. So repaying debt is itself an investment, at your debt’s interest rate, and the question is whether anything else is likely to pay more.

Two things change what a debt really costs. The first is tax. Where interest is tax-deductible, you get part of it back: in Norway 22% of the interest on mortgages, student, car and consumer loans,¹ in Denmark about a third of the interest on personal debt, on the first DKK 50,000 a year,² and in Sweden 30%, though since 2026 only on mortgages and other loans with security.³ The Netherlands gives relief on mortgage interest, at up to 37.56% in 2026.⁴ Finland ended relief on home loans in 2023,⁵ and in the US mortgage interest counts only if you itemize your deductions, while credit card interest never does.⁶

The second is inflation. It shrinks the real cost of a debt by as much as it shrinks the real return on an investment, so the fair comparison puts both after inflation. That matters most where prices rise fast. The IMF expects inflation of about 2% a year in most rich countries over 2027–2031, but 12% in Nigeria and 17% in Turkey.⁷ A loan at 25% where prices rise 20% a year costs about 4% after inflation; the same loan where they rise 2% costs more than 22%.

Stocks earn more over the long run, with bad decades along the way

Across 16 rich countries since 1870, stocks returned 4.6% a year above inflation, and 5.5% a year since 1950.⁸ US stocks did a little better than average, 6.6% a year above inflation since 1900.⁸⁹ Forecasters expect less for the coming decade. Vanguard expects US stocks to return 4.2–6.2% a year and other developed markets 4.5–6.5%, before inflation;¹⁰ J.P. Morgan expects 6.7% for large US companies.¹¹ Both sell investment funds, and both still expect less than the record.

We use 4.5% a year above inflation for a broad world index fund, before fees and tax: close to the long-run record across rich countries, and at the top of what forecasters expect for the decade ahead. The US Federal Reserve and the European Central Bank both aim for inflation of 2%,¹²¹³ and at that rate it works out to 6.6% a year.

That’s an average, and the path is rough. US stocks fell 37% in 2008,¹⁴ and over the ten years 1999–2008 they lost 3.8% a year after inflation.¹⁴¹⁵ Across the markets the UBS Yearbook tracks, stocks and bonds have each lost more than 70% after inflation on several occasions since 1900.⁹ Paying off a debt has no bad years.

Against a loan that costs nothing above inflation, stocks won in 88% of ten-year periods. Against one at 7% above inflation, about 9% a year when prices rise 2%, they won 48% of the time: a coin toss, on the record of one of the better stock markets. At 15% above inflation, less than most credit cards cost, they won 6% of the time.

That’s where we draw the lines. A debt that costs more than 7% a year above inflation, after any tax relief, is clearly worth paying off before you invest. One that costs less than government bonds have earned clearly isn’t: invest, and pay it on schedule. Government bonds have returned 1.6% a year above inflation in the US since 1900 and 1.9% across 16 rich countries since 1870,⁹⁸ and we use a little less, 1.5%. Between the two it’s closer. Once a debt costs more than stocks are expected to earn, paying it off has a small edge; below that, investing probably earns a little more, and paying off is the safer choice.

Credit cards cost more than twice what stocks earn

As the chart at the top shows, credit cards charge 22.1% in the US, 21.6% in the UK and 16.5% in the euro area,¹⁶¹⁷¹⁸ more than twice what stocks are expected to earn. Personal loans cost 11.9% in the US and 10.0% in the UK, also past the line, and 7.9% in the euro area.¹⁶¹⁷¹⁸ Most other borrowing sits in the middle: new car loans at 7.1% and federal student loans at 6.5% in the US,¹⁶¹⁹ and new mortgages at 7.0% in the US, 4.6% in the UK and 3.6% in the euro area.²⁰¹⁷¹⁸

Money you put into a mortgage is hard to get back out without borrowing again, while a fund can be sold. That’s one more reason not to rush to overpay a cheap one.

Some student loans work differently. In the UK, loans on Plans 2 and 5 are repaid as 9% of your income above a threshold and written off after 30 or 40 years,²¹ so overpaying only saves money if you would otherwise repay the whole loan. In New Zealand, student loans are interest-free while you live there.²²

First a cash buffer, then any employer match

Paying off debt and investing both tie up money you might need. Without cash on hand, the next surprise goes back on the card. In a 2025 survey by the US Federal Reserve, 63% of adults would cover an unexpected $400 expense with cash or its equivalent; 15% would put it on a credit card and pay it off over time, and 12% couldn’t pay it at all.²³

So keep a small buffer before you attack a card, even though the card costs more than the savings earn: the buffer is what stops the card filling up again. Once the expensive debt is gone, build it up. The Fed’s survey uses three months of spending as its yardstick, and 55% of US adults had that much set aside.²³

The other exception is money your employer adds. Many employers pay into a workplace pension when you do; in the UK, employers must pay at least 3% of qualifying earnings for staff who are automatically enrolled.²⁴ If your employer adds half of what you put in, that’s a 50% return on the day you save it, more than any debt costs. Take the full match, then put the rest toward the expensive debt.

What to do

If your dearest debt is worth paying off first

1. Keep a month’s spending in cash, then put every spare amount on the dearest debt and pay the minimum on the rest.
2. Take your employer’s full pension match first, if there is one.
3. Ask your lender for a lower rate, or move the balance to a cheaper loan if the fees cost less than the interest you’d save.
4. When a debt is gone, keep paying the same amount: into the next debt, then into a broad index fund.

If it’s cheap, or a close call

1. Pay the debt on schedule and invest what you can spare in a broad, low-cost index fund, in a tax-free account if your country has one.
2. Overpay instead if a sure return matters more to you than a likely higher one: if you’d sell in a panic when stocks fall, or you’ll need the money within a few years.
3. Look again if your rate changes. A variable rate that climbs past about 6.6% tips the balance toward paying it off.

General information from public data, not personal financial advice. No one paid for this page, and nothing on it depends on you buying anything. Reviewed 2 Oct 2026.