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Is It Better To Invest or Be Debt Free?

paying off debt quickly

A big reason many people put off investing is debt. It doesn’t really make sense to ramp up investments while paying 21 percent interest to credit card companies, but what about low interest debt? Obviously the answer depends on many variables including income, how much debt you owe, and if you are investing for short or long term goals.

We currently have lots of mortgage debt, mostly from investment properties, that we’d like to see paid off quickly. However, we don’t want to miss out on investment gains and compound interest either. Is is better to invest or be debt free?

Completely Debt Free In Six Years!

Assuming we maintain our current level of income and expenses, if we were to stop investing in our 401k’s, IRA’s, and taxable brokerage accounts and put all the money toward paying down mortgage debt, our primary home could be paid off in about three years. The commercial building we own will be paid off in a little over four years. At that point, we could throw everything toward the other rental house and four plex, paying those off in another two or three years.

If we went for that strategy, we would own six rental units and our own home outright. Monthly expenses would drop dramatically. Rental income would produce a conservative profit of around $5500 per month. That means that if we sacrifice all investments besides paying off mortgage debt for the next six or seven years, we would get an automatic return of 3.25%-4.75% (mortgage rates) plus have a pretty sweet amount of semi-passive income.

Missing Out On Investment Income

If we did stop investing in the stock market, we lose interest and dividends, plus our income tax bill would go up. In fact, with our current tax bracket, that strategy sends somewhere around $10,000 a year to Uncle Sam.

You can’t really guarantee a rate of return on stock investments, but if we assume an average return of 8% and also assume we invest the same amount as last year for the next six years, we’d be missing out on just over $100,000 in interest!

That being said, 2014 was a banner year for us as far as investing. I don’t believe this year will be nearly as good. Still, you can’t argue with the power of compound interest.

What’s the Best Choice?

I don’t know that there is a right or wrong answer. I don’t think it’s a bad idea to laser focus on one money goal while neglecting other parts of the financial picture, especially if that goal is paying off high interest debt. It’s a bit more gray when the debt has low interest rates. Math says to always put money where it earns the highest rate of return, but emotionally, paying off any debt sometimes wins out, especially if it means more career freedom or the ability to improve quality of life.

I think for now, we’ll keep investing as much as we can in the stock market and let our tenants pay off the mortgages, even though a big part of me is salivating at the thought of owning real estate outright. It will take longer for us to be completely debt free, but that’s a first world problem I’m OK to live with.

Would you sacrifice investing to pay off a low interest debt quickly? Do you think mortgage debt is good debt?

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About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.


  1. I have some low-rate debt for the sole purpose of investing it. It all depends on what kind of rate you can consistently generate.

    If the rate of return is greater than the carrying costs of the borrowed money, you win… If I were to pay down my debt, it would be a huge “opportunity cost”.

    • It’s easy to do the right thing if you look at the numbers. It’s the emotional part of having debt that gets to me and makes me want pay it off, even if that’s not the smart move.

  2. It is always a conundrum, isn’t it? We are facing the same question. Do we pay cash for our house being built or take a mortgage and preserve the investments which are providing us with great interest and dividend income? If you go the debt free route, of course you can get back into the market later, but at what price? It might have had a major correction in the meantime and you pick up some bargain stocks. Or there might have been huge growth like the last 8 years that you miss out on. Can you take your interest and dividends which you’re already paying tax on and use them for paying down mortgage, while maintaining ownership of the equities? One thing I would never do is to stop paying into my retirement accounts.

    • That is such a small percentage of our investments that it probably wouldn’t amount to very much. I think we will keep putting the majority into tax deferred accounts to realize those gains and not have to pay more in taxes.

  3. I think the key there is the interest. How much are you paying in interests versus making money in interest. If it’s high interest cc then I would focus on that first, but for something like my car loan, which is very low interest, I’d rather invest the money.

    • Having debt is a mental barrier and I totally get the math, but I still would like it gone. That being said, I think it’s smarter for us to stick to our current strategy and not worry too much about the mortgages.

  4. That is a tough one! I don’t know what I’d do in this specific situation – I think I’d take the same approach as you but can definitely understand the temptation of being free of all of your mortgages in 6 years. That would free up a nice chunk of money that you could do more with. That being said, anything that can be done to avoid sending more money to Uncle Sam is a good thing in my opinion. 🙂

    • I really think taxes are the biggest reason to keep throwing money into the 401k. I feel like we already pay too much in tax and I’d hate to lose even more.

  5. I’m pretty firmly in the keep a low-interest mortgage around forever camp – never having had a mortgage! I’m just so excited about investing, really. We are ‘practicing’ for that strategy now, though, by keeping my student loans (2.33%) and investing the payoff money. We’re not even investing it for the long-term (i.e., not aggressively) and we still have the reasonable expectation that our returns will beat the pants off that interest rate. Of course, there is a risk in that approach, but IMO it’s more risky to NOT invest for retirement while you focus on paying off a mortgage.

    • That’s kind of how I feel too. We aren’t spring chickens and it would hurt to take six years away from investing in retirement.

  6. Honestly, this is really a tough question for me. I’m sure lots of us wants to live a debt free life, but of course we also want to invest into something. I salute your positive attitude Kim and I’m sure you really made a good decision.

  7. Being a conservative guy money wise, the idea of getting a guaranteed rate of return by paying off debt sounds better than investing. But the time to invest is now when I’m young-ish, because it’s hard to beat the effect of compounding interest. And throw on the tax breaks you can get from paying student loan and mortgage interest. That makes it important to me to find a balance. If I’m patient, it will be worth it because when I’m done paying off debt, I will have a nice amount of savings to boot. And still be relatively young-ish.

    • I would put as much as I could into retirement while you are young. The rest will be paid off soon enough if you avoid lifestyle inflation.

  8. Focus on tax deferred investments first, like a 401K that gets a match. Or high interest rate debt. Then, do after-tax investments, like an IRA. Invest in your own business, it you can get a solid return.

    Pay mortgage debt last. But still pay it if you can.

    • Thanks for the advice. I do want to have everything paid off before I leave my job, but I don’t think I would do it at the sacrifice of all other investments.

  9. Great Santini Parenting School

    Paying down debt is a guaranteed return, so obviously debt around 8% or higher deserves consideration. Lower rates of debt need to be carefully evaluated against the expected returns of your investments, the loss of any tax benefits you receive from your debt, the possible loss of diversification in regards to your overall picture and the loss of time in your investment equation with compounding. I like the idea of feeding your investments while your renters retire the debt.

  10. Because I´m not in the camp of folks who are in a super rush to retire as young as possible, I would definitely postpone investing for a short while in order to pay off a low interest debt quickly. But like you said, it´s definitely a personal choice, and depends on where your priorities lie.

  11. I consider that being debt free is one factor for me to a successful investor because having debt while investing, I cant maximize my potential and the money I can use. For those with debt, I think it’s better to pay that off before you move to investing.

    • I think that’s true with most consumer debts but I think we’ll still invest even with mortgage debt.

  12. Totally depends on the individual imo. I wrote about this many times and people vehemently disagreed with me about investing instead of paying off debt. I am pretty firmly in the investing camp and I don’t really see that changing, especially when the stock market is going up like it has been 😉

  13. This really depends on the type of debt. Certain debt falls under the category of spending money to make money. It’s essentially an investment. Debt that doesn’t have the potential to make you money is an emergency and should be addressed as such. Plus, paying off debt first prepares you to live without that money already, so the transition to investing that money is easier

  14. Nate M at LendEDU

    This is a great article. I agree that there really is no right or wrong answer. Everyone’s finances and debts are different, all with extremely different interest rates. Looking at your finances and being well rounded between bills, debt, and investments has always seemed the right option to me.

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