Debt vs Save Decision Engine
Example: Debt balance: 15000 $ · Debt APR: 7.5 % · Extra monthly dollars available: 300 $ · Expected annual market return: 7 % · Marginal tax bracket (for taxable account): 22 % · Comparison horizon: 10 yr
| Pay debt first (1=yes, 0=invest) | 1 |
| Guaranteed debt-payoff return | 7.50% |
| After-tax investment return | 5.46% |
| Margin between the two paths | 2.04% |
| Investment FV if you choose to invest | $47,749 |
Worked example
A 7.5% auto loan offers a guaranteed 7.5% return on every extra dollar applied. Investing in a taxable account at 7% gross with a 22% tax bracket yields 5.46% after tax — a 2.04 percentage point gap in favor of paying debt. The verdict is 'pay debt first.' If the debt were a 3% mortgage, the math flips and the market wins.
Frequently asked questions
What APR is the tipping point where investing wins?
Varies by your after-tax investment return. In a taxable account in the 22% bracket, a 7% gross market return becomes roughly 5.5% after tax. Any debt above 5.5% APR is likely worth paying off first; below it, investing usually wins. In a Roth IRA (tax-free growth), the tipping point rises because taxes don't reduce the investment return.
Should I pay off student loans before investing in my 401(k)?
Not if your employer matches contributions. A 100% match on the first 3% of salary is a 100% instant return — far above any debt rate. Capture the full match first, then apply remaining extra dollars to the debt-vs-invest comparison in this tool.
Does this apply to mortgage debt?
Yes, with a nuance: mortgage interest is deductible for some filers (those who itemize), which lowers the effective rate. A 6.5% mortgage may cost you only 5.1% after a 22% deduction — run the effective rate in this tool, not the nominal APR.
What if I have multiple debts at different rates?
Apply this tool's logic debt-by-debt, highest rate first. Pay the minimum on everything, then direct all extra dollars to the highest-rate balance until it's gone (the avalanche method). This minimizes total interest paid — CFPB research confirms the avalanche saves more than the snowball over most timelines.