Pay Down or Power Up?

How to Decide Between Debt and Investing

You’ve finally got a little extra money each month but now you’re stuck on a question that’s way less fun than deciding between taking the kids to the park or the pool…

Should I use this money to pay off debt or start investing?

Let’s break it down in a way that’s clear, strategic, and won’t require a spreadsheet or a second cup of coffee.

Here’s the Big Picture:

• The average long-term return of the U.S. stock market is about 10% annually.

• Once you factor in inflation, the real return is closer to 7%.

That 7% number is your financial decision-making line.

If your debt is costing you more than that? You’re losing money by keeping it.

If it’s less than that? You’ve got options—and a chance to grow your wealth while paying down debt.

If Your Debt Interest Rate Is Higher Than 7%

Credit cards, store cards, personal loans with high interest

That debt is growing faster than your investments would, so, focus on paying it off ASAP before investing anything.

If Your Debt Interest Rate Is Lower Than 7%

Federal student loans (around 4–6%), car loans (3–5%), or mortgages

Here’s where you can multitask like the champ you are. Your money has the potential to grow faster in the market than it costs you in interest, so you don’t have to wait until you’re debt-free to start investing.

Rather, split your extra cash between:

• Paying more than the minimum on your debt

• Investing in a retirement account like a 401(k) or Roth IRA

Real-Life Example

Let’s say “Mom” has:

• $6,000 credit card debt at 22% interest

• $20,000 student loan at 5%

• $10,000 car loan at 4%

Step 1: Tackle the credit card debt first. That 22% interest is eating your money alive.

Step 2: Once that’s gone, split the extra cash each month—maybe 50/50 between:

• Making larger payments on the student loan

• Starting (or increasing) retirement contributions

That way, you’re paying down debt while letting your money grow for your future.

Note: “Mom” should ontinue to pay the minimum payments on the car loan until she has paid off the student loan in full. Then, she should split the extra cash each month between larger payments on the car loan and increasing retirement contributions.

Smart Mom Tip

• If your employer offers a 401(k) match, take it—even if you have low-interest debt. That match is free money, and mama doesn’t leave free money on the table.

• Consider automating both debt payments and investments. Let’s be real—if it’s not automated, it might not happen.

Mom Brain Recap

• Interest rate > 7%? Focus on paying off debt first. Your money can’t grow faster than it’s leaking.

• Interest rate < 7%? Start investing while paying off debt. You don’t have to wait for a $0 balance to build wealth.

• Remember:
  Paying off debt = freeing up future cash
  Investing = building your future financial freedom
  

  Still trying to decide whether to invest or pay off debt first?

  The free SheWealth Debt Repayment Worksheet helps you organize your balances and interest rates—especially helpful when figuring out which ones are over or under that 7% magic number. Find it in the Resource Garden.