Pay off Debt or Invest – Which is Best for the Deep in Debt?

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pay off debt or invest

That, my friends, is the question. There’s lots of debate in the PF blogging world about whether or not people should pay off debt or invest, or do both at the same time. But what if, like us, you’ve got LOTS of debt. LOTS and lots? Does the scenario change?

Rick and I go back and forth on this when discussing whether we should pay off debt or invest. One minute we feel immense urgency to get the debt off our plates, and the next minute we are planning our investment strategy and how to design it to catapult us to financial independence quicker. Is our “huge debt” situation unique, and does it change the game? Here are some of the pros and cons that tumble around in our heads:

Against Investing Now


The Debt Really is at an Unhealthy Level


We started 2013 with a 65% Debt to Income (DTI) ratio. It’s down now, and continuing to drop, but our DTI ratio is still at a very unhealthy level. Shouldn’t we be working ASAP to rid ourselves of, at the very least, the consumer debt before we start investing? Not to mention the fact that our investments may lose money. Then we’d really be in trouble. Should people in our situation even be asking whether or not we should pay off debt or invest?

We’ve Got a Good Chunk of Retirement Savings Put Away


Not massive amounts, but enough that with continued stable growth, we’ll be just fine in retirement – IF we don’t have any debt. The point is that we’re not desperate for retirement funds, but we are desperate for an easier “now” situation. We aren’t currently contributing to Rick’s 401(k) simply because things are so tight, but his employer adds money each quarter, and we will contribute once the debt situation is a little less intense.

For Investing Now


The Debt Really is at an Unhealthy Level


Pay off debt or invest? Well, we’re already up the creek without a paddle, so why not put a few dollars into investing every month, right? I mean, at least we’ll be growing more wealth as we pay off our debt, even if that debt payoff will take longer to achieve. Plus, investment earnings could surpass the amount we’re paying on interest debt each month. I realize this is a bit of a “que sera sera” attitude, but at times we feel like we’ve got to not scrutinize our financial decisions quite so intensely, as the fear can help us to make wrong decisions.

One option we’ve looked at is helping others pay off their debt, through peer-to-peer lending, that would also allow us to make money as well. This would allow us to invest small amounts that wouldn’t take away too much from our debt repayment efforts. You can check out many of the different Prosper reviews available online to see if that might be a possibility for you.

Pay off Debt or Invest or…Save?


It would be nice to graduate to debt freedom with a bunch of savings/investments in tow, but it would definitely increase the amount of time it takes us become debt free. Is that smart? What do you think? We are working on an emergency fund, but obviously with the minimal amount of interest savings accounts are paying, the emergency fund isn’t going to be the investment vehicle that catapults us to massive amounts of wealth, nor should it be. This is one reason we think we should invest right now.

So there you have it. This is our dilemma. Do you have any opinions on whether its better to pay off debt or invest first? How do you answer the question? Do we start investing, even if it’s just a bit, right away, or do we continue to go full board on paying off the debt?

We haven’t figured out the answer to whether its best to pay off debt or invest first, so for now we’re just reading up on all the available investment avenues and working to decide which ones are most in our comfort level, price range, and which will most quickly help us accomplish our goal of financial freedom.


So, what do you think: Should people who have massive amounts of debt be investing, or should they get rid of some (or all) of the debt first?

(Editor’s note: The pay off debt or invest decision can be a very difficult one for many to make, generally speaking. I believe both can be done, but each situation is unique and should be based on your personal circumstances. I covered the topic myself several months ago and you can check out that post here.)


Photo courtesy of: Haven’t the slightest

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Laurie is a wife, mother to 4, and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom, and to a simpler, more peaceful life.


  • Rebecca @ Stapler Confessions says:

    I don’t think that there’s a right or a wrong answer here. As someone with $200k in student loans at under 5% interest (some of them at 2.5%), the math is in favor of investing. But honestly, that kind of debt load weighs heavily on us. It limits our decisions about our careers and family. So, I think that making the decision between paying off debt or investing should be a gut-check. What’s going to make you sleep better at night? For us, it’s having greater financial stability by having fewer monthly payments.

    • Laurie @thefrugalfarmer says:

      Yeah, we struggle with that a lot too, Rebecca, just the whole peace of mind thing. Based on that alone, I’d definitely say that paying off the debt is the way we should go.

  • Tom @ Entreprenewlyweds says:

    Laurie – Great timing on this. We had a few people ask us this over the past few weeks, so we wrote a blog covering it.

    To me, it is different for every person/couple. From a basic math perspective, it depends on the type of debt, and tax deductions and which interest rate is higher. So if your debt is a credit card and the rate is 12% and you can’t make more than 12% somewhere else, you are better of to pay off debt. On the other hand, if your debt is a student loan debt and you have rates locked in at 3% and can make more than that somewhere else, it makes sense to invest.

    The bigger, and probably more important question, is what is each individuals comfort level with their debt. Some people’s debt just hangs over them, where it may make sense to focus very hard to pay it off.

    We actually did both. We focused extra payments on the highest interest rate card while also starting to invest in real estate. The extra monthly cashflow from our real estate helped pay the debt down faster.

    • Laurie @thefrugalfarmer says:

      Thanks, Tom!! I appreciate you sharing the article, and the advice. I will definitely check out that post.

  • Travis @debtchronicles says:

    We didn’t do any investing while enrolled in our debt management plan because the our payments to our monthly financial commitments were just too high to allow us to do so. Now that our DMP is complete, we have more funds available. We still have debt, BUT here’s what we did. We have an “end game” for the rest of our consumer debt – ie, we know that if we pay X amount towards our debt each month, it will be gone in Z years/months. We’re comfortable with that path….so the funds left over in our budget are used for discretionary spending, efund, and investing.

  • Marie @ 4HWD says:

    For me, I would prefer to pay off my debt first than investing. You can plan easily if you have a debt free life.

    • Laurie @thefrugalfarmer says:

      That’s a great point, Marie. And, the debt does drive us nuts. πŸ™‚ Thanks for sharing your thoughts – we appreciate it!

  • Jen says:

    I am currently facing the same dilemma. Knowing that the debt is decreasing is encouraging but not seeing any type of savings or investments increasing is a little depressing. What I do to increase my savings/investments a bit is take any annual bonuses and pay raises and put it towards it.

    • Laurie @thefrugalfarmer says:

      That’s another great idea. We have been thinking a bit about just taking, like, $500 and putting it into a Scottrade account just to get our feet wet and see where it goes. We wouldn’t be traumatized if we lost it, and based on what we’ve learned about investing so far, I think we’d probably do okay.

  • Brian @ Luke1428 says:

    I’d be in the pay off debt first camp. I know you may miss out on several years of investing but paying off large amounts of debt takes intense focus and discipline as you know. I would not want that attention diverted in the least by focusing on another issue. Plus you don’t really know what the market is going to do in the future. You always know what paying off debt will do – lead to a better future.

    • Laurie @thefrugalfarmer says:

      Thanks, Brian – I really appreciate the honesty! Yeah, the thing about paying off the debt is that it’s a guaranteed success. πŸ™‚

  • Kay says:

    It’s definitely a personal decision. For those with high levels of debt though, they should probably be paying that down especially if the interest rate they are being charged is higher than what they could expect to make investing. The exception would be saving for retirement. You would want to at least save enough for the employer match if you have one. I don’t like debt myself so we are even paying our mortgage down aggressively which some people disagree with

    • Laurie @thefrugalfarmer says:

      Yeah, the debt definitely stresses us out, and as I mentioned, we have a fairly good chunk of money saved for retirement. Thanks for sharing your thoughts, Kay!

  • Kathy says:

    My response would be to do both at the same time. Of course every dollar invested is not directly going to pay off debt. But if you don’t put something toward investments, you might miss out on years of compounding by waiting until debt is all paid before starting. Yes, this method makes it so your debt is paid off later, but with very careful research and investing, you might be able to make more in interest income than the interest rate on your student loan debt.

    • Laurie @thefrugalfarmer says:

      This is our dilemma, Kathy, and what we think about the most when it comes to investing. And so the battle goes. πŸ™‚

  • Kurt @ Money Counselor says:

    As several have said, each situation is unique, but I tend to favor paying off debt first, especially high-interest debt.

    I think it’s a mistake to think of repaying debt differently than or separate from investing. Mathematically, a debt payment is identical to making an investment with a guaranteed, risk-free return equal to the debt’s after-tax interest rate. So you’ve got several investment options for any surplus income, and among these options is “investing” in your own debt and earning that guaranteed, risk-free return mentioned above.

    • Laurie @thefrugalfarmer says:

      Great point, Kurt. Paying off debt really is an investment, isn’t it. Thanks for sharing that valuable info – it helps us a lot!

  • Michael Solari says:

    If you’re deep in debt then you need to work on digging yourself out. If you let it pile up there will be a tipping point at which point you can no longer live that current lifestyle. There is good debt and bad debt too. I think it’s ok to invest while you carry debt like mortgage, studen loans, car payment, etc. But if you have high credit card debt then your focus should be there.

    • Laurie @thefrugalfarmer says:

      Yeah, I would say that’s a large chunk of our debt right now is the CC debt. We haven’t used them in quite some time, so the balances are going down, but there’s still a ways to go. Thanks for weighing in, Michael – I appreciate it!

  • Amanda @ Passionately Simple Life says:

    There’s so many factors that can go into a decision like this. The best thing about focusing on the debt is that it frees up future money for whatever it is you want, and allows your future self much more freedom. However, investing right now allows you to take advantage of compound interest. Perhaps focusing on debt but a little bit of emphasis on investing is the way to go as a general answer. I’m more of an intense person and focus more on the debt repayment side just to get it out of the way.

    • Laurie @thefrugalfarmer says:

      Thanks, Amanda, for sharing your thoughts. Yeah, I would say big picture, that’s us too – we just want the debt gone, yet we don’t want to miss out on investment opportunities and years of compound interest, like Kathy mentioned. Tough choice!

  • Emily @ evolvingPF says:

    If the minimum payments on the debt are really quite high (your former DTI is… shocking) there’s no choice in the matter. But as you eliminate debt and have more breathing room so that you can absorb small emergencies and irregular expenses, I think starting to invest makes sense if the interest rates on the debt are low enough. For me, it would all be an interest rate vs. rate of return calculation, after the minimums are at a manageable ratio.

    • Laurie @thefrugalfarmer says:

      Yeah, I would say that’s our main battle, Emily, is the battle between the interest vs. rate of return calculation, and the battle of the mind that comes with having/paying off the debt. We just need to figure out which one holds the biggest “returns” for us right now.

  • Matt Becker says:

    I think, like some others have said, that with a DTI so high paying off debt really becomes the priority. It’s a simple matter of security. Beyond that, I think some of it has to do with an evaluation of the interest rate on your debt and then some of it has to do with personal financial goals and comfort level. I’d say if your interest rates are 6% or higher, then to me it’s a no brainer to pay off the debt. That’s a guaranteed return that you can’t get anywhere else. Below that and it’s a little more personal. But that’s not scientific. Just an opinion.

    • Laurie @thefrugalfarmer says:

      “It’s a simple matter of security”. LOVE that, Matt. Thanks for sharing your opinion – you know I value it.

  • Mrs PoP @ Planting Our Pennies says:

    When you get to the point where you think you can commit to some investing without having to rely on your credit card, the 401K might be a really good place to start. Between the match and tax benefits, the ROI for putting funds in one of those can be pretty darned high the first years. But if it means you’re going to have to turn to a credit card if the dryer breaks, I don’t think it’s a good plan.

    • Laurie @thefrugalfarmer says:

      Yeah, we’re thinking that too, Mrs. PoP. I don’t really understand how Rick’s employer retirement plan works, but we are lucky that they put money in each month whether we match or not, and it’s getting super good returns and has been the whole 3.5 years he’s been there. So, we’ve got that going for us. πŸ™‚

  • Dianne says:

    While I’m in debt, I am not investing, but after getting hit with a massive plumbing bill, which I had to put on my card, since my emergency fund was only $1,000, I decided to split the money 50/50 I would pay on my debt with money going into emergency fund. My cards have zero interest right now, and I figure that when I have a larger amount of money in my e-fund as my debt, I can take the money out of my e-fund and get rid of the debt. That way, while I am paying down debt, I have the safety net, in the event of another emergency, and use my e-fund and not have to put it on the card anymore.

    • Laurie @thefrugalfarmer says:

      That’s a wise move, Dianne. Thanks for sharing a valuable lesson. That very well might be an option for us too. We could always take that money out for investing later as well. Great comment – thank you!

  • DC @ Young Adult Money says:

    Well I wrote about how I was not planning on paying more than the minimum on my student loans and I got about 40 comments disagreeing and about 3 that agreed with me haha. I think if the interest rate is high then it makes sense to get rid of it but sometimes investing can produce much bigger returns. The money I put into my blog as an investment is paying off in dividends, so I’m much more likely to put money in my small biz than pay down student loans or pay more on my mortgage. It’s really up to each individual, though, and what they are comfortable with.

    • Laurie @thefrugalfarmer says:

      LOL, funny, isn’t it, DC? Interesting thought about the blog being an investment too. I never thought of it that way before, but really, it is……

  • JC @ Passive-Income-Pursuit says:

    Interesting situation and one that I’m thankfully not having to make since the only debt we have is our mortgage. Another pro to investing is if it’s in a 401k and you get a match. That’s free money so I’d say if at all possible then at least contribute that much. Other than that I’m in the Dave Ramsey boat of stop all investments and pay down the debt. Especially if it’s high interest rate consumer debt. Pretty much anything with an interest rate over 6% I’d say needs to be paid down as soon as possible because that’s a guaranteed “return” whereas the markets can be quite fickle and turn south just when you don’t need them to.

    • Laurie @thefrugalfarmer says:

      Thanks, JC, I always appreciate your advice. That’s where we’re leaning right now, but when I see people doing so awesome with investing, I wonder if we’re making the right choice, you know?

      • JC @ Passive-Income-Pursuit says:

        Based on past history, which of course doesn’t mean it will repeat, the markets are due to cool down. The returns from 2013 has a lot of people interested in the markets again and wanting to invest. I’m sure you know this, but 30% returns are abnormal, especially for broad indexes. Since the long-term return for the markets is somewhere around 8%, any debt with an interest rate over that and you’d technically be losing money over the long-term. I guess it also comes down to how big of a burden the debt is on you and Rick. You mentioned how things were tight financially, so every extra dollar you put towards paying down consumer debt lowers your next month’s payment which in turn would free up more room in your budget. If the debt is something that y’all really hate then get rid of the debt as fast as you can since that will let you go full steam ahead towards debt and be done as quick as possible and then continue on to really supercharge your investing. Y’all have made great progress so far and just remember to keep celebrating the little victories along the way.

        • Laurie @thefrugalfarmer says:

          Thanks again for sharing this wisdom, JC. Yeah, we’re completely expecting the markets to cool off too, especially based on last year’s performance, and this is a large reason we’re wanting to put some money aside so that if there’s a big dip we can buy some stuff up real quick. Also, Rick’s employer’s stock is due to split soon, so we’re wondering if we shouldn’t pick up some of that too.

  • Michael@Save-Invest-Grow says:

    It really comes down to what type of debt it is, and what the interest rate is. If you’re talking consumer or credit card debt, I’d start by paying that first. Get some good momentum going with the debt repayment, and then implement a savings/investment plan as your balance declines.

  • Raquel@Practical Cents says:

    To me it all depends on the interest rate you’re paying on the debt. I agree with others, if it’s very high payoff the debt if it’s low split it by paying off debt and investing at the same time.

    • Laurie @thefrugalfarmer says:

      That seems to be what many are saying. I’ll have to share everyone’s thoughts with Rick and see what he says. Thanks for weighing in, Raquel – we appreciate it!

  • anna says:

    I tend to like a blend of both, but I would agree with others that it depends on the interest rates/amounts of each debt. Once the debt is at a more reasonable level (where it doesn’t feel so overwhelming), then perhaps repay debt and invest at a 90%/10%, then 80%/20%, 70%/30%, etc. over time? Keep us posted on what both of you decide to do, I’m curious!

    • Laurie @thefrugalfarmer says:

      That’s a great idea, Anna. I like the idea of starting with a 90/10 split and then moving the investment percentage upward as we get more used to the idea. Thanks for this, Anna!

  • Debt Hater says:

    I myself am constantly struggling with this decision, as I have a huge amount of debt. Normally the decision that I end up going with is a little bit of both. I’ve trimmed my emergency fund down quite a bit by throwing large lump sums towards my debt, but it’s still very healthy. I also am putting 6% into my 401k every paycheck so that I can take advantage of the 3% match that my employer offers – can’t beat free money!

    I have also maxed my Roth IRA for 2013 and again for 2014. I feel like I don’t want to “lose” the years of contribution and compound interest. That paid off in 2013 with the huge gains I was able to see, far above the interest rates of my student loans. Hopefully the same thing will happen in 2014 for me!

    • Laurie @thefrugalfarmer says:

      Sounds like you’re doing a terrific job at balancing the two. We’re not ready to be that aggressive in terms of investing, but we are considering doing at least something. Thanks for sharing your plan – I appreciate it!

  • Mackenzie says:

    I am in the same boat Laurie! Right now we are just trying to pay off debt, and as soon as that is gone, we can be more aggressive with investing/retirement funds.

    • Laurie @thefrugalfarmer says:

      Glad to hear we’re not alone. πŸ™‚ It’s tough to find a balance, I think, when you’re carrying a lot of debt. It’ll be nice when the debt is gone and the decisions are easier.

  • Shannon @ Financially Blonde says:

    This is such a tough call and at the end of the day, I think it is a personal one. I know that people stress about debt, but having a nest egg or a cushion helps alleviate some of that stress. I like to see a combination of the two. But I understand why people choose one over the other too.

    • Laurie @thefrugalfarmer says:

      Yeah, Shannon, you’re right. Now if we can just figure out which one is best for us to choose. πŸ™‚

  • Dear Debt says:

    I’ve been thinking about this a lot lately. I’m halfway through my debt repayment journey. I’m turning 30 this year and only have $1500 in retirement and 1k in an EF. I’m feeling a bit nervous, and of course way behind. I feel like i need to put more toward retirement but feel intensely focused on paying off debt.

    I know this is not scientific or mathematical at all — but I say do what makes you sleep best at night. For me, right now, it’s paying off debt.

    • Laurie @thefrugalfarmer says:

      Yeah, I agree, Melanie. And speaking from over 15 years ahead of you, you can focus on debt repayment for a couple of years and still be fine. Us being “older”, this is where I get a bit worried. Thanks for weighing in. πŸ™‚

  • Mr. Grump says:

    This is always a tough choice. When we started our journey to FI we had 2 car loans and a mortgage with PMI. The car loans at 0 and 2% were not costing us much in terms of interest such as a credit card does but we ended up paying off the 2% loan and then taking the additional $300 a month and putting it on our mortgage. We got a short term win, saved some interest, lessened our monthly expenses. I imagine the benefit of paying off high interest cc’s and the peace of mind that follows would be the best choice. I can’t decide where school loans fall in the pecking order I just know they never go away. I think I would pay off consumer debt then re evaluate. Until then investing doesn’t make much sense especially since you sound very risk averse.

    • Laurie @thefrugalfarmer says:

      Thanks, Mr. Grump! I really appreciate your insight, and yes, we’re are risk averse – good catch on recognizing that one. πŸ™‚

  • Mark Ross says:

    I think one should invest despite having too much debt. He can invest little by little while allocating much of his income paying off his debt. It’s a good plan, isn’t it?

    • Laurie @thefrugalfarmer says:

      Thanks for sharing your thoughts here, Mark – I appreciate it! We’ll see what we end up deciding. πŸ™‚

  • Kathy @ SMART Living says:

    Hi Laurie! This is a great question and you are wise to answer it before going to far. Speaking from personal experience I would advise two things. First cut back your expenses and “Right-size” your life …my husband and I call right-sizing the journey to understanding what is most important to you in your life in every category, and then figuring out how to best achieve it with your resources, time and energy. Then once you’ve made all the necessary choices, then work to go debt free with everything you have right now. My husband and I are entirely debt free and it is the most liberating thing you can do. Once there you can begin focusing on investments–but frankly our investments are all 100% debt free too. We don’t buy anything any more unless we have all the money to pay for it up front. It wasn’t easy but we wouldn’t have it any other way. I/we strongly suggest it! Good luck whatever you do! ~Kathy

    • Laurie @thefrugalfarmer says:

      Thanks for sharing your experience and your thoughts, Kathy! We did the “right-sizing” thing a bit over a year ago, and are currently in the debt payoff process. It’s great to hear from someone who’s been there and is now at that debt free place. You’ve given us lots to think about – thank you!

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