Capital Allocation

Pay Off Debt vs. Invest

You have extra cash. Do you lock in a guaranteed return by paying off debt, or try to beat the rate in the stock market?

Available Cash (Lump Sum)$10,000

The Debt Option

Debt Interest Rate (%)6.50%

This debt is tax deductible (e.g. Student Loans, Mortgage)

The Invest Option

Expected Return (%)

Tax Bracket (%)

Time Horizon (Years)10 Years

Mathematically, you should:

INVEST IT

This strategy yields a net benefit of $1,079 over 10 years.

Head-to-Head Comparison

Pay Off Debt

Guaranteed Rate

6.50%

Future Value Avoided

$18,771

Invest It

Expected Rate (Gross)

8.00%

Future Value (After Taxes)

$19,851

The "Sleep at Night" Factor: Math assumes investing returns a steady 8%. In reality, the stock market crashes. Paying off debt provides a 100% guaranteed, risk-free return of 6.50%. For many people, the peace of mind of being debt-free is worth more than a few thousand dollars in theoretical market returns.