Should I Pay Off Debt or Use Those Funds to Invest?

Should you pay down debt or start to invest with your expendable cash? Despite what Dave Ramsay may say, I do not think this is a one-size-fits-all question. I believe you should be able to evaluate your situation holistically before you come up with your answer.
So let’s examine the elements that go into this decision.

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What Kind of Debt Are We Talking About?

Have you run up high-interest credit cards on designer purses or shoes? To me, this is the worst kind of debt: high-interest status debt. If this is your vice, stop it! You have better ways to prove your worth than designer accessories. If you have this kind of debt, get rid of it first and learn to change your spending habits.
But are we talking about low-interest debt on a sensible car or home? A Home Equity Line of Credit for solar panels? To me, this is acceptable debt. This debt knocks itself out slowly but surely without breaking you in interest and fees.
I believe debt is like fat: some good, some bad. Look closely at the terms and what you are getting for this money. When I secured my first home mortgage, my father said to me, “Natali, you’re paying for money. It’s an acceptable service to pay for, but you should want the best deal on it.”
We all need to pay for money from time to time. The point is to minimize this effect on your monthly cash flow. In this economy, my rule of thumb is not to pay anything over 4% in interest unless it is an investment that I know will return more than that. Let’s discuss this trade off.

What Kind of Interest Rates Are You Paying on This Debt?

Albert Einstein said this of interest: “He who understands it, earns it. He who doesn’t, pays it.”
I find this to be an extremely motivating quote! The point being: You want your money performing for YOU and not for a creditor.
So weigh your options!
Do you have an investment that you know will perform at 10%? Great! Yet you have debt that you are paying at 17%  interest? You’re losing money. Pay down the debt first.
Maybe you have an investment that you know will perform at 10% but have some acceptable debt at 5% interest? You’ll still be making 5%! Make that investment!
We recently bought a family car (because we are expecting our third child and needed a third row, God help us!). We financed half of it at 2.99% interest. To me, this is debt worth carrying because we got a safe car out of the deal and our investments do way better than that.
You want to weigh your investment option against your debt service like a scale. See how you come out year over year.

Can You Use Your Investment Cash Flow to Accelerate Your Debt?

Maybe your debt and your cash flow are going to be pretty even. For example, your rental property pays you $600 per month (after taxes and insurance), and your debt service costs you $450 per month. Can you use the extra $150 to pay down your debt service faster so that the entire $600 per month is eventually yours to spend? How long will that take? How long can you afford to take a small profit until it is all profit? Run the numbers!
Remember this: Every parenting book I’ve ever read (and I’ve read A TON) tells us to teach our kids delayed gratification if you want them to succeed in life. We need that, too. Can we invest in something and wait for the payoff? Can you live on little cash now to see big rewards later?
In my experience, buying into your investment portfolio sooner rather than later is usually better. Your debt should not be your excuse to wait. If you wait too long, deals go by you in the fast lane. Of course, you don’t want to strap yourself so thin that you can’t buy groceries. But you don’t want to watch other people make money from the sidelines. You must be continually weighing your options and ready to take a leap sooner than later. I hate to end with a cliche but it is true: Fortune favors the bold.
What do you think? Under which circumstances should someone pay off debt first? When is it better to use funds for investment?
Let me know your thoughts with a comment!

About Author

Natali Morris

Natali Morris is a technology and finance contributor for CNBC and MSNBC. She also writes about personal finance on her own personal site, She is the wife of Clayton Morris and mother of two (soon-to-be three) children. Her constant preoccupation is in not screwing them up.


  1. Christy Greene

    Hi Natali,

    I love your husbands podcast and thank you for contributing in this blog! I can see where some amount of debt can help accelerate wealth opportunities and I can appreciate that. If it makes sense, and you have the financial means to support that debt even in tough financial times, then I don’t see a problem with it. For me, at my age, I am much closer to retirement than not, especially EARLY RETIREMENT. So for me, I want to minimize risk as much as possible.
    I am not going to put 20k down on a 100k investment property only to loose it in foreclosure. I am only going to buy real estate if I know that I can afford it. Real Estate is a game where patient wins out in the end.

  2. David Roberts

    Interesting thought about debt in retirement. I am 37 but i think about that all the time. I see people say they want to reduce risk so they reduce debt.

    But if you own 20 rentals and you own them in cash, you have all the risk. Sure the cash flow is higher but you also have all the risk. It seems to me if you could be completely cashed out of an investment them the bank has the risk. You have credit risk, but that cam be repaired faster than losing your cash.

    I dunno. It seems to me that caking out ams having 300 a month cash flow on each rental, worry all the cash in the bank, is safer. Its been debated on bp but i find it to be a great debate.

  3. William Martin

    David what you’re saying makes no sense. How can owning rentals debt free be risky??? Debt = risk bottomline. If the market drops and you have no renter YOU pay the mortgage. When the value drops and you’re underwater and they foreclose depending on your loan they chase YOU for the deficit. If its free and clear you never sweat because everything is pure cashflow and when its not rented theres no need to rush to out a bad renter in there. I could go on all day but I strongly disagree

    • Kyle Hipp

      It would be riskier for me to invest in real estate without leverage than it is to utilize prudent leverage. I would have only 2 properties, that is if I still bought my first duplex with leverage 10 years ago. I would have missed out on years of valuable experience and hundreds of thousands of dollars of rental income. I finance my properties on 15 year fully amortizing notes at 70% loan to value. This has allowed me to have the ability to finance properties, build equity, build cashflow and reinvest. I will most likely have a property or two paid off in the coming years as I retire as my family of 4s sole provider from employment at 31 next year and run my investments and construction business. To have less properties and no debt takes away experience and leaves more risk by being less diversified in the location of properties. It also puts a bigger target on you from a legal liability position. Having a mortgage leaves only so much room for a lawsuit to grab remaining equity, a free and clear property leave more room to try and pursue a lawsuit, frivolous or not.

      • David Roberts

        Thanks Kyle thats what i was eluding to in my post. The more cash you leave in the more risk you take. If you got sued and last the house with all your cash in, you lost it all. How long before you are profitable when leaving cash in? Site on paper you have the asset and cash flow but the bricks don’t buy bread and real estate is not a liquid asset. I would argue that having a cash flowing rental woth all your cash back out and paying the bank to take the risk is less risky for you. Don’t forget, you have all your cash back in the bank!

        Its just another viewpoint. Good discussion.

    • Natali Morris

      I agree William and I’m not sure what David’s argument was. That’s why I asked for clarification above. Free and clear is the best way to go and all debt service should be geared towards getting there! Outright ownership has very little risk when compared to stock ownership or money market accounts. IMHO.

  4. Christy Greene

    I have to agree with @William Martin. Debt equals risk. I never really understood ALL the risk for just a mere $300 in cash flow. For me that is just another extra hour of work in my business so it is not worth it to me. I understand with all the tax benefits it ends up being about $700 a month but to me that is just not worth it. Why would I put any amount of down for a house only to lose it? I work too hard for my money to lose it on foolish speculation that someone else will pay monthly for 30 YEARS. T
    Those who don’t understand compound interest, pay it. Those who do, get paid the interest.

    • Kyle Hipp

      I understand compound interest. I see that wise use of leverage will allow me the ability to take $20,000 in cash, purchase a property, repair and remodeling. Then refinance and return not only my original $20,000 but also return an additional $5,000 – $10,000 I did not have before. I will also not own a property with 30% equity, that I did not have before. I will also generate an additional monthly income of $200 in positive cashflow. Lastly, my tenants will pay my property off in 15 years, putting half of the mortgage payment in principle reduction from day 1. So at the end of the day I would much rather go from $20,000 in cash to $30,000 in cash, along with $30,000 in equity and $2,400 a year in cashflow and another $3,000 minimum a year in principle reduction. This triples the original capital in 6 months and produces a 25% annual return on the original $20,000 which was already completely returned. Compare that with earning even a stellar 10% or $2,000 a year on that original amount. I have every reason to believe I hold less risk when I have more cash and equity and cashflow

      • Christy Greene

        It all comes down to perspective. I don’t have 15 years. A young whipper snapper may have all the time in the world. In fifteen years, I want to be done and getting ready to pass them down to the younger generation.
        I want to done in 15 years. I don’t want to have to worry about all this stuff when I am older. I want a simple life in all aspects when I am in my sixties.

        I watched my dad buy ANYTHING he wanted, new cars, the top of the line Apple computers, travel for over 20 years . I am going to do it his way. I just have a different perspective.

  5. Jack Macioce

    Great article! All too often, it seems like people do not think of debt this way. At the end of the day, it seems like people take on too much debt for the wrong reasons, and it negatively impacts their monthly cash flow. More debt payments means less towards retirement, REI, savings, etc.

  6. I think what David is saying is if your original investment is returned and your playing with the houses money, so to speak , the bank has all the risk. You have a cash flowing property using OPP. (Other people’s money). Liability is a huge consideration when investing. If you get sued and you own the property outright, it is gone. If the bank holds the note then no loss to you.

  7. Brad Lohnes

    Hi, Natali. Thanks for the post. I really enjoyed your BP podcast episode, too.

    I don’t think that my view on acceptable debt is as broad as yours. I understand where you’re coming from, but I feel like car loans, etc. even at low interest rates can act like “death by a thousand cuts”.

    However, it is true that investments, especially property, usually need some time to grow and mature. Therefore, it’s important to plant seeds as early as possible. For this reason, I actually see paying off my home as a lower priority than investing in rental properties, for example. In this case, I think that if there are good deals in the market, then it should be a priority to get buying, even if it means taking some equity out of your home, and therefore extending the time it will take to pay it off. The tradeoff is that you need to work in the meantime in order to keep paying your mortgage, but you’d need to work anyway if you don’t have investments capable of generating passive income.

    I extend this philosophy to my existing rentals as well. As both rents and property values increase, I think it makes sense to get a topup loan even on rentals, as long as the increased rent can be used to pay down the additional debt. The newly borrowed money is, of course, to be used as deposit on another rental.

    Despite managing our finances closely in line with what Dave Ramsay advises, this is the area that our philosophy differs. It IS important, however, to note that there is risk involved. If your home is paid off, it’s pretty hard to lose it. However, if you lose your income before you have enough passive income to cover it, you could risk losing your home if you haven’t paid it off yet. It’s a risk-reward tradeoff.

    • Natali Morris

      Good point Brad. I think it depends on your debt threshold. I wouldn’t want a “thousand cuts” kind of debt but some is acceptable. You have to consider what is acceptable to you. Home mortgage, etc. I like the idea of an investment as a planted seed. Good metaphor!

    • Natali Morris

      Hard to say. That isn’t the worst interest rate I’ve seen on student loans but if you can find a way to accelerate payoff, it is even easier to justify. It also depends on what you intend to do with that degree. If you are paying 6+% on a liberal arts degree for the sake of just going to college, that is hard to justify! If you are paying 6+% on a medical degree you 110% intend to use, that makes more sense. What is your sense of it Alex?

  8. Timely article. I’ve been wrestling with the same question. It’s not a ton and it has a low interest rate. As a Dave Ramsey listener, I’ve been convicted. In my eyes, my student loan hasa low monthly payment and low interest rate and I figure that I can make more money and earn a higher interest rate with real estate than I am paying on my student loan and I can start my real estate investing now.

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