You have an extra $300 this month. You could put it on a credit card that charges 24%, or invest it like your coworker keeps telling you to at lunch.
Paying the card saves you a cost you can see on your statement. Investing the $300 could gain or lose money, and nobody knows which ahead of time.
This guide walks through five questions: whether you have savings for surprise bills, how high your card's rate is, whether your employer adds money to your retirement plan, how you'd handle a drop in your investments and whether to split the money between the two. It also shows what a $3,000 card balance at 24% costs you each month.
Investing involves risk including loss, and past performance does not indicate future results.
To see how investors research their choices, join our free investor livestream on November 17, where CEO Jaspreet Singh shows how to use ChatGPT and Claude to research stocks like a pro.
Start with the interest rate on your debt
List every debt with its balance and APR. APR, or annual percentage rate, is the yearly interest rate a lender charges on the balance you carry.
Card interest is a cost you can see ahead of time.
| Example | Numbers |
|---|---|
| Balance | $3,000 |
| APR (example rate, not an average) | 24%, about 2% a month |
| Interest in the first month | about $60 |
| Interest over a year if you only pay the interest | about $720 |
| Monthly payment to pay it off in 12 months | about $284 |
| Total interest paid over those 12 months | about $404 |
These figures assume a fixed 24% APR, interest counted monthly as the APR divided by 12, equal end-of-month payments and no fees or new charges. Real card companies calculate interest and time payments their own way, so actual figures differ.
Under these assumptions, every dollar you pay toward the balance lowers next month's interest. A dollar you invest could gain or lose value, and nobody knows which in advance.
What investing can and can't promise
Investments go up and down, and they can lose money. FINRA explains that every investment carries some risk, which means you don't know the return ahead of time.
So card interest and investing returns aren't the same kind of number, even when people compare them side by side. Card interest is a known cost, and investing returns aren't guaranteed.
The market also goes through bull and bear markets, and sometimes a correction, which is a drop of 10% or more from a recent high. A drop like that is harder to sit through when you're also making card payments every month.
A framework to decide: invest or pay off debt
Investing involves risk including loss, and past performance does not indicate future results.
When you weigh paying off debt against investing, look at your risk tolerance, your goals and the type and rate of your debt.
Do you have a small cushion for surprise bills?
Without savings, a surprise bill goes on a card and adds to your debt. The Climb to Wealth class teaches this order: save your first $2,000, pay off credit card debt in the right order, then automate it so you're not relying on willpower.
The guide on how to save your first $2,000 shows how to build that cushion, and Briefs explains why to build the emergency fund first. Over time, that cushion can grow into a full emergency fund.
How high is the rate on your debt?
The higher the rate, the more each month of carrying it costs you. Investor.gov's general guidance is to pay off high-interest credit card debt before investing.
That's general education from Investor.gov, not personal direction for you. If you have card balances, the guide on how to pay off credit card debt lays out the steps, and Briefs explains why high-rate card balances usually count as bad debt rather than good debt.
Does your employer add money when you put money in your retirement plan?
Some employers add money to your retirement plan when you put money in, which is often called a match. Plans work differently, so check your own plan's rules to see whether yours has one and how it works.
Briefs explains what a 401(k) is and how these plans work with your paycheck.
How would you handle it if an investment dropped in value?
That's your risk tolerance, or how much your investments can drop before you'd want to sell. If watching $1,000 turn into $850 would make you sell, or leave you short on a card payment, that's worth knowing before you decide.
Briefs has a guide on what type of investor you are, and another on the psychology of market crashes.
Some people split extra money between the two
One option some people consider is splitting the extra money, like $150 to the card and $150 toward investing. It isn't right for everyone, but it's a common middle ground.
The 75/15/10 split Briefs teaches puts at most 75% of your pay toward lifestyle, at least 15% toward investing and at least 10% toward savings. It doesn't say whether to keep investing the 15% while you pay off cards, so that choice is yours.
Finding money for either goal usually starts with a budget and a look at subscriptions you forgot about.
Questions people ask about investing vs paying off debt
Is it smart to invest while paying off debt?
It depends on the framework above. Look at your rate, whether your employer adds money to your retirement plan, whether you have savings and how you'd handle a drop, then decide what fits your situation.
Card interest is a known cost and investing returns aren't guaranteed, so the higher your rate, the more that known cost matters.
Invest or pay off debt: questions to ask yourself
- Start with the rate on each debt, since card interest is a known cost.
- Investing can gain or lose value, and your own retirement plan's rules decide whether there's a match.
- Make sure you have a cushion, then decide how to split any extra money.
When you're ready to learn about the investing side, Briefs explains how much of your paycheck to invest. Thinking this through is a big part of managing your money. To see that kind of research in action, join our free investor livestream on November 17, where CEO Jaspreet Singh will research stocks live with ChatGPT and Claude.
