Pay Off Debt vs. Invest Calculator
Should you pay off debt or invest? Simulate both strategies side by side with a net-worth crossover chart, a tax-adjusted expected return, the breakeven return rate, and a plain-English verdict.
How to use this tool
- Enter your debt balance and its APR.
- Enter the monthly cash you could put toward either debt or investing.
- Set your expected annual investment return and the tax rate on gains.
- Choose a time horizon in years.
- Read the verdict, compare the two final net-worth figures, and check the crossover chart and breakeven return.
“Should I pay off my debt or invest?” is the most-repeated question on personal-finance forums, and most calculators give you a one-line answer with no way to see why. This one runs a month-by-month simulation of both strategies using the same cash flow and plots them on a single crossover chart, so you can watch where one path pulls ahead of the other.
Two ideas make the answer trustworthy. First, it uses a tax-adjusted expected return — a 7% return taxed at 15% is really 5.95%, and that often flips the decision. Second, it computes the breakeven return: the investment return at which both strategies tie. For typical fixed-rate debt that breakeven lands right at the debt’s APR, which is exactly the rule of thumb — if you can’t reliably beat your APR after tax, pay the debt.
Pay-debt-first directs all spare cash to the balance, then invests once it’s gone. Invest-now covers the debt’s interest and invests the rest from day one. Final net worth = investments minus any remaining debt.
Formula
Both strategies are simulated month by month over the time horizon.
Strategy A (Pay debt first): Each month, debt grows by balance × (APR ÷ 12), then the full monthly cash is applied to debt until it is gone; any remaining cash is invested.
Strategy B (Invest now): Each month, only the interest (balance × APR ÷ 12) is paid; all remaining cash is invested.
Investment grows as portfolio × (1 + rnet) + contribution, where rnet = (grossReturn ÷ 12) × (1 − taxRate).
Net worth = portfolio − remaining debt. The breakeven return is found by bisection: the gross return at which both strategies produce the same final net worth.
How it works
This calculator simulates two parallel strategies month by month: aggressively paying down debt first (then investing the freed-up cash), versus investing immediately while servicing only the interest on the debt. The key insight is that the guaranteed saving from eliminating a debt at a known APR must be compared against the after-tax expected investment return, not the gross return.
Assumptions include a constant monthly cash amount, a fixed APR (no rate changes), and a flat effective tax rate applied to all investment gains each year. The breakeven return is determined by binary search, narrowing down the gross annual return at which both strategies produce identical final net worth.
Worked example
Worked example
- Inputs: $10,000 debt at 5% APR, $500/month available, 10% expected annual return, 0% tax rate, 10-year horizon.
- Tax-adjusted return = 10% × (1 − 0) = 10.0% per year (r_net per month = 10% ÷ 12 ≈ 0.8333%).
- Strategy A: Pay $500/month toward debt until it is gone (~21 months at 5% APR), then invest the full $500/month for the remaining ~99 months. Final net worth ≈ $76,529.35.
- Strategy B: Pay only the monthly interest (~$41.67/month) on the $10,000 balance and invest the remaining ~$458.33/month from day one. Final net worth ≈ $83,887.28.
- The breakeven APR at which both strategies tie equals the debt's own rate: 5.0%.
Invest now wins: final net worth $83,887.28 (invest) vs $76,529.35 (pay debt first); advantage = −$7,357.93. Breakeven return = 5.0%.
Key terms
- APR (Annual Percentage Rate)
- The yearly cost of carrying a debt, expressed as a percentage; divided by 12 to get the monthly interest factor.
- Tax-adjusted return
- The after-tax investment return: gross return × (1 − effective tax rate). This is the fair rate to compare against a debt's guaranteed APR.
- Breakeven return
- The gross annual investment return at which both strategies (pay debt first vs invest now) produce identical final net worth.
- Net worth
- Total investment portfolio value minus any remaining debt balance at the end of the horizon.
- Strategy B (invest now)
- A strategy where only the monthly interest on the debt is paid, leaving the principal outstanding, so the maximum cash can be directed into investments from day one.
Frequently asked questions
- Why is the breakeven return usually equal to my debt APR?
- Paying down a dollar of debt earns you a guaranteed return equal to the APR. Investing that dollar instead only wins if its after-tax return exceeds the APR. So the tie point — the breakeven — is the APR itself. If your expected after-tax return is below it, pay the debt; if above, invest.
- Should I really ignore the emotional side?
- No. Math says invest whenever your after-tax return beats the APR, but guaranteed debt payoff is risk-free while market returns are not. Many people rationally pay off high-interest debt first for the certainty and peace of mind even when the spread is small — the verdict notes when it’s close to a tie.
- What return should I assume?
- A common long-run assumption for a diversified stock portfolio is 7–10% before inflation and taxes. Be conservative: enter a realistic after-fee number, then let the tax field reduce it further. Guaranteed debt payoff has no such uncertainty.