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Paying Off Debt vs. Investing: Earning Money and Finding Freedom

This morning wasn’t the usual morning. Late-night storms left much of Charlotte out of power with noticeable debris on the roads. Replacing stop lights with policemen caused my morning commute to last 2 hours (which it’s usually not). I was understandably PO’d until I cranked up the radio and heard one commercial which stole my attention for the rest of the ride.

Pay Off Debt

It was a mortgage loan officer convincing people to switch from 30-yr mortgages to 15-yr, which I’m completely onboard with (assuming your budget allows). The benefit is undeniable when comparing the difference in interest you’ll pay, but I had a major problem with what he said next:

“No one is making money in stocks; no one is making money in the market. Any extra money you have should go towards your biggest asset, YOUR MORTGAGE!”

Problem #1 – I believe the house is the asset, the mortgage is a liability.  (Crystal’s Comment:  I agree.)

Problem #2 – Who is No one? And why aren’t they making money right now?  (Crystal’s Comment:  I also wondered how I became a no one…we have made good returns in stocks…)


This small radio advertisement had me reevaluating my personal situation. I currently have $9200 left to pay on my student loan at an interest rate of 4.8% (much like you’d see on a mortgage) and I’m still waiting for

student loan refinance companies

to offer lower rates. Last year, after my Roth IRA contribution and making sure I had an emergency fund to cover 6 months, I invested $12,000 into a Mutual Fund. I’ve been extremely pleased with the 16% it’s been earning.

The way I see it, if I can earn >4.8% then why would I bother paying off my student loan? I wouldn’t be losing money per se, but I’d be foregoing earning more. If I left the $12000 in my online savings account earning 1.2% then I would certainly pay off the loan.

I could also think about buying gold coins as an investment versus investing in real estate.  Gold always is worth something and could keep growing in value with time.  By the time I retire, who knows how much gold could sell for per ounce?

Indebting vs. Investing

This is what I call “Indebting vs. Investing.” Should I pay off debt or invest funds? The answer to your specific scenario isn’t just about numbers, it’s about psychology; it’s how you think. I broke it down to Earning money or Finding Freedom. What drives you more?

As long as the interest I pay on my loan (mortage or student) is less than the interest I can earn by investing in say a home based business, I’m not going to worry about my debt. This is usually the case with a credit card debt consolidation loan and this works for me. This is because I’m more driven by earning more rather than finding freedom.

If I were to be offered a job that pays more than my current one, but requires more time away from home and in the office, I would accept the new position. No matter what the circumstance (within my morals) I would choose to earn more.

On the other hand, someone else may value their freedom more. In the above scenarios they would:

1. Choose to pay off debt because they don’t like the feeling of owing someone or worse, being “owned” by someone.

2. Turn down the job offer so they can have more free time.

So when asking yourself if you should pay off debt or invest your excess funds, first ask yourself what kind of person you are (you may surprise yourself).

To some, time is money. To me, money is money.

Crystal’s Comments:  To Crystal, time is priceless, debt sucks, and investing is profitable (hopefully). I would rather focus on the best ways to make passive income.  This is why my husband and I save, invest, AND are paying off our mortgage in 11 years or less.  I love investment returns and I love to pay off debt.  I like having my cake and eating it too.  🙂

Where do you stand – pay off debt or investing or both?

24 thoughts on “Paying Off Debt vs. Investing: Earning Money and Finding Freedom”

  1. Cassie

    Interesting perspective, Hunter. Personal Finance is indeed personal and your decisions need to be in line with your own goals and dreams. The component I would ask you to give more consideration to is RISK.

    “As long as the interest I pay on my loan (mortgage or student) is less than the interest I can earn by investing, I’m not going to worry about my debt. This is because I’m more driven by earning more rather than finding freedom”

    You are guaranteed to make 4.8% paying off that student loan. Additionally, you free up that payment amount for future investing. I am glad your mutual fund is doing so well and I hope it continues to perform BUT there is Risk involved. It could certainly lose value.

    Another way to look at this is,if you could borrow $9200 today at 4.8% and use the money to invest, would you? Most of us would not borrow to invest. I would sell some of that investment to pay off the student loan TODAY.

  2. Jackie

    Put me firmly in the both camp! I see no reason why it needs to be an either-or situation for me…

  3. Ravi Gupta

    I would pick the middle option I believe. That is investing a bit of money and making extra payments. I’m one of those people who doesn’t like to owe anything anyone, therefor I would be trying to pay off that debt ASAP. You make a good point though about getting a better return. You also have to factor in risk, what happens if your mutual fund declines by 16%?

    -Ravi Gupta

  4. Ryan

    Currently all my debt is under 7% (and I don’t have a mortgage yet) and totals around $43k. My wife and I have cut our 401k to just match company contributions and we’re dumping the rest on all the debt but one student loan (which we pay minimum on).

    Our plan is this:
    By Sept. we’ll have our debt down to $23-24k on just the one student loan.
    Then we are saving each month towards a house DP and adding to emergency fund to get to at least 3 months.
    We plan to buy a house next June.

    After all this is when we will start putting most of our money towards retirement (I will be 27 and wife will be 26).

    As you can see, we are working towards finding freedom first and then we will transition to earning money.

  5. First Gen American

    I do both too, with a bias towards debt reduction.

  6. Everyday Tips

    I invest even though I still owe on my mortgage.

    Given your situation though, I am in the camp that would have paid off the loan, had a nice dinner to celebrate, and then invested the rest. I don’t mind a guaranteed return of 4.8 percent in essence, and not owing money feels fantastic.

  7. krantcents

    Given a choice, I would invest versus paying any additional money on my mortgage. I can earn more than the 5% (net interest lower due to IRS) interest on my mortgage. For me, it is more important to have investment growth.

  8. Nicole

    The difference is that the stock market isn’t guaranteeing a return of more than 4.8%/year. You don’t know going forward what return it is going to give you, especially in the relatively short term.

    Paying down your mortgage is a safe investment. You know precisely what nominal return it is giving you. The only question is whether or not you’ll have chances to refinance at a better rate in the future.

    We do both for diversification reasons. Money in the stock market for long-term investing to capture potential higher returns. Money in our house as a form of real estate investment and a form of safe investment.

    Not so long ago we would have gotten a far better return on a 6.5% mortgage than on the stock market. Only now have our assets recovered to nearly their peak from several years back. There’s higher returns over the long run but also higher volatility.


  9. JT McGee

    If I could borrow at 4.8% (don’t forget about the write-off!) I’d take that deal right here, right now.

    The marginal cost of holding onto low-cost debt is outweighed big time by the fact that rates are going higher in the future, no doubt about it.

    For index fund investors, I don’t think it makes sense to invest over paying down debt. Yeah, yeah, I know…individual stocks aren’t for everyone, but the stock-picker/individual investor has a leg-up over the general population in being able to size up their risks to the market, whereas I don’t think the average index fund investor has that insight to make the realization.

    If you’re long the entirety of the S&P 500, do you really know your exposure to a downturn? Do you know what your exposure is to higher interest rates? What about a falling/rising dollar? Going even further…the S&P500 is market cap weighted, so are you really keeping up with each adjustment and modifying accordingly?

    Too long; didn’t read: If you’re a passive investor, then passively invest in paying off debt. If you aren’t, then you can probably realize better returns with leverage, and better understand the risks of such a strategy.

  10. Jenna, Adaptu Community Manager

    I’d focus on paying off debt before investing. I’d still contribute to my ROTH IRA and 401(k) plan.

  11. AAAMPblog

    Every situation is different and you do an excellent job of pointing out the different factors that should be considered. I believe the concept of diversification works in most areas of finance. If the decision is not clear cut then do BOTH. That reduces risk and provides the opportunity for a better outcome!
    Ken Faulkenberry

  12. Little House

    I’m a person who lives somewhere in the middle. I like saving and investing money, but I also like to see my debt dwindle. I don’t like the “pay off debt before investing” rule because for some people (like me!), this means never getting to the investing part – and that will become a huge problem in the future. In theory, paying off debt first is great…if you’re 20-something. But once you reach your late 30’s, if you still have debt, you need to balance paying it off with investing and saving (especially if the interest rate on the loan is under 5%.)

  13. kh

    I’m with @Little House – the pay off debt first attitude can be a better option when you’re young. Can, not is always. But when you’re older, putting off investing and saving is a bad idea, IMO. Right now I’m leaning more towards saving simply because I *need* an emergency/medical cushion. Once I have that, I’ll become more aggressive about paying down debt. Am I losing out on some money this way? Yes. But if I weren’t doing it this way, I’d be risking more debt or financial ruin by not having any fallback in case of an emergency.

  14. LifeAndMyFinances

    First of all, I noticed that you had a good emergency fund built up, which is great, but I don’t think you should ever put your emergency fund in the stock market. While mutual funds are more stable than individual stocks, they are still volatile and can potentially go down.

    If the economy dips again, you may lose your job and then find out that your emergency fund is only worth $6,000. It could happen.

    The better option is to put your money into a hgih-yield savings account, or a money market account. We currently have ours in a 4% interest checking account. It’s not a ton, but our money is safe, and we’re earning $600 dollars a year.

  15. Julie @ The Family CEO

    LOL…I came here to say exactly what most others are saying. That is, when paying down debt, the return in guaranteed. When investing in the stock market it’s not. Still, I understand the desire to invest before all debt is paid off. We do both.

  16. Sunil from The Extra Money Blog

    good post, and the perspective of arbitrage makes sense.

    i don’t mind taking out a mortgage at 5% and deduct the interest expense on my taxes if i can invest risk free in a fixed deposit / CD at 9.5% overseas in a stable and growing economy. but if i was restricted to US based investments only, my approach would be completely different. there is no right action, as apparent in the comments. this decision is very personal, one which also involves a lot of intangibles (human psychology)

  17. Thanks for your post. It made me think about what I really value now. I want to do both if I can. But I guess I want freedom first so I will just have to focus on earning money without having the slight of anxiety at the back of my head for debts that I have to pay.

  18. Jacob @ My Personal Finance Journey

    Very interesting post! Thanks for sharing! For me, I am not in a particular hurry to pay off my 30 year mortgage. It is low interest and a good type of debt in my opinion. The way I prioritize things is as follows – 1) fund my 401k up to the employer match level, 2) fully fund roth ira, 3) fully fund 401k, and then 4) start paying extra principal on my mortgage.

  19. Hunter


    Your comment really got me thinking. I did not give much consideration to risk, although most people SHOULD. This investment was guaranteed to pay 6% for the first year so I knew I was getting 1.2% (equal to what I would be earning in my savings). Even without the guarantee, I’m not sure risk would’ve crossed my mind all that much (although I repeat – IT SHOULD!). I’m not sure if this is because of my age, I am often encouraged (more importantly can afford to) be aggressive with my investments. Maybe I would have a different approach if this were money in my emergency fund, or funds I could see myself dipping into in the near future.

    Your last scenario blew my mind, I congratulate you for that. You would think, after reading my post, that I would HAVE TO take the loan out and invest the money; given that I am ALWAYS looking to earn more. For some reason, I had the exact opposite reaction. I thought it was a ridiculous idea; however, it makes perfect sense going by my logic. Roughly a year ago I had LASIK eye surgery. I had the money to pay in full but again, I decided to finance @ 0% for 12 months and leave the money in my savings. Seems like a rather inconvenient way to earn $48.

    The way I see it – which now I see makes no sense – is that it’s okay to STAY in debt to invest, but my view completely changes when looking at GOING into debt to invest. I have no reasoning… :/

    Another reason I don’t make sense…

    I disregard risk like it’s not a real thing because I don’t mind losing money. I can lose $100 in one day in an investment and not care. So I’m asking myself: how can someone not care about losing $100 but care so much about earning $48? Answer: It only makes sense in my head. I view it as a Michael Jordan – “you miss 100% of the shots you don’t take” kind of mentality. If I fail while trying to be successful, I don’t mind. Lots of psychology involved here….I suppose I’ll have a follow up post coming.

    Thanks for your thoughts!

  20. Hunter


    I have a rewards checking account at my local bank where I earn roughly $200/year. I believe this is similar to the 4% interest you’re earning in yours, but I get paid by spending rather than the balance I keep (I keep relatively low balance in checking).

    My questions for you:

    -What is required in order to receive the 4%? (ie. swiping your card 20+ times/month)?

    -With the government limiting interchange fees, have you heard anything about your 4% interest being reduced?


    Hunter @ funancials

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  22. Mike @ debt consolidation

    Paying down debt and investing are extremely similar concepts. When it comes right down to it, you’re really trying to figure out where to invest your money: the stock market, a Certificate of Deposit, mutual funds, or your debt. When you’re paying down debt it’s just like investing in your debt. You can deposit the money in the bank and earn 5%, or begin paying off a mortgage. It really is the same concept. Every day we read about the growing credit card debt problem that plagues consumers throughout America. But what if you’re not one of those consumers? In fact, what if your one of the lucky ones that finds themselves with some disposable income and you’re trying to figure out what to do with the money?

  23. Quick cash loans

    Before investing It is important that u first pay off your debt then only u will be able to live a better life and can enjoy the gains on the money u invested

  24. Loren @ revive her drive

    I am totally agree with the quote “No one is making money in stocks; no one is making money in the market. Any extra money you have should go towards your biggest asset, YOUR MORTGAGE!” and will go with this.

    Loren @ revive her drive

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