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Sorry it’s been a minute! March was very busy. I was blessed to be booked, but that meant a lot of work. Plus, it was tax season and I think my household was sick for 75% of the month? Yeah. Something had to give.
But we’re back now and my nose is now running from allergies. Lately in my financial coaching, I’ve been working with folks on how to think about paying off debt vs. investing. What do you focus on first? Can you do both? So I wanted to give you all a simple framework to use:
The Magic Number Is Around 7%
Money, at its core, is about returns. When you pay off debt, you're earning a guaranteed return equal to your interest rate. Pay off a credit card charging 22% APR, and you've just made a risk-free 22% return. Warren Buffett wishes he could do that.
When you invest, you're chasing a probable but not guaranteed return. The stock market has historically returned around 7–10% annually over long periods, but that's an average, not a promise. Some years it's 25%. Some years it's -30% and you're stress-eating cereal for dinner.
So the general rule of thumb goes like this:
High-interest debt (above ~7%): Pay it down first. Aggressively. Credit cards, personal loans, and anything in the double digits should be treated like the financial emergency they are.
Low-interest debt (below ~4–5%): Investing likely wins over the long run. A 3% mortgage while your investments compound at 8%? You're mathematically better off investing.
The messy middle (5–7%): This is genuinely a toss-up, and your feelings matter here. More on that in a second.
Don't Forget the Free Money
Before you do anything else, make sure you have a basic emergency fund in place. Start with $1,000, then build up (while you’re paying down debt) to 3-6 months of living expenses.
Next, and don’t skip this, contribute enough to your 401(k) to get your employer match. If your company matches 4% of your salary, not contributing is the equivalent of handing back part of your paycheck. That's an instant 50–100% return on your money. No debt payoff beats that.
After capturing the match, then have the debt-vs-investing conversation.
The Part Where Math Meets Your Brain
Here's what the spreadsheet crowd doesn't always admit: personal finance is psychological.
If you have $30,000 in student loans at 5.5% interest, the math might say "invest." But if those loans keep you up at night and make you feel like you're drowning, that psychological weight has real costs; in stress, in decision-making, in life quality. Paying them off faster might be worth it even if it's not optimal on paper.
On the flip side, some people carry low-interest debt just fine and would rather watch their investment accounts grow. That dopamine hit is real too.
Neither approach is wrong. Know your number, know your nature.
A Simple Starting Framework
Build a starter emergency fund of $1,000.
Contribute enough to get your full employer 401(k) match.
Keep building an emergency fund (1–3 months of expenses).
Aggressively pay down anything above 7% interest. Use the avalanche or snowball method.
For everything else, split your extra dollars based on interest rate and your own comfort level.
Invest consistently for the long haul.
The goal isn't to find the mathematically perfect answer, it's to find the answer you'll actually stick with. Consistency is more important than optimization.
That’s all I have for you today! Until next week, friends,
Catie