One of the most common financial questions out there is, “Should I pay off debt or invest first?”
At first, the obvious option seems to be, “Duh!” Pay off what you owe and then try to build your wealth.
But good investing opportunities come up.
The right answer depends on your unique financial situation.
Your debt type, interest rates, financial goals, and risk tolerances all play a big role.
This guide walks you through all the possible options and scenarios to help you answer the question, “Should I pay off debt or invest first?”
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The Basics of Debt and Investment
Before deciding whether to pay off debt or start investing, you need to understand what each one means and why some types of debt or investments are better (or riskier) than others.
“Good” vs “Bad” Debt
No one wants to be in debt.
But it’s vital to understand that all debt is not created equal.
Some types of debt can actually help you in the long run to build wealth, but others can become major traps if you leave them unmanaged.
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What Does It Mean to Invest?
Investing is when you place your money into an asset expected to grow in value over time.
The goal is to generate a high ROI (return on investment), ideally outpacing inflation.
By using good investing strategies, you put your money to work and generate profits.
How to Decide If You Should Pay Off Debt or Invest
When choosing between paying off debt and investing first, you need to review your finances and objectives in depth.
Typically, the smartest financial decision depends on the interest rates, your risk comfort, and your long-term goals.
Risk Tolerance and Time Horizon
Investing always involves risk, but historically speaking, time is always your greatest ally.
The longer your investment horizon is, the more opportunity you have to ride out market volatility and benefit from compounding returns.
But this is where your risk tolerance and timeline are important to understand.
For example:
If you had invested $5,000 in Bitcoin at the start of 2019, when the price was around $3,800, your investment would be worth $181,935.67 today.
When Paying Off Debt Should Come First
In some cases, paying off debt should be your top priority.
High-Interest Debt
- Credit cards and payday loans with interest rates above 20%.
Feeling Overwhelmed
- If your debt feels unmanageable or you’re falling behind on payments.
Short-Term Goals
- If you have big expenses coming up, like a home purchase, a wedding, or starting a family, being debt-free gives you more flexibility and peace of mind.
When Investing Might Be the Better Choice
If your debt has a low interest rate, typically under 4–5%, it may make more sense to start investing.
Low-Interest Debt
- Student loans or mortgages often have low interest rates. If you’re paying 3.5% on a loan and can potentially earn more through investments, especially buying Bitcoin, investing could give you a better return.
Long-Term Objective
- Crypto markets are known for their volatility, but over time, Bitcoin has had strong growth.
Hedges Against Inflation
- With inflation holding the rate it’s had over the last few years, simply saving cash is not enough. Historically, Bitcoin has significantly outperformed inflation, making it a good hedge for long-term investments.
Bitcoin is your best hedge against inflation
byu/Cold-Enthusiasm5082 inBitcoin
Bitcoin as an Investment
Investing in Bitcoin while having active debt might seem counterintuitive.
But you must weigh the risks and rewards carefully.
To invest safely, especially while managing current debt, make sure to use non-custodial cold wallets like Material Bitcoin.
It keeps your assets offline, immune to hacks, and secure even during market changes.
✅ Checklist: Should You Pay Off Debt or Invest First?
Use this quick quiz to help guide your decision.
What are my current interest rates?
Do I have an emergency fund (3–6 months of expenses)?
What are my investment goals?
How do I feel about financial risk?
Results
💳 Mostly debt-focused answers? Prioritize paying off what you owe.
📈 Mostly investment-focused answers? Consider building a diversified portfolio.
⚖️ Mixed? A hybrid strategy could offer the best of both worlds.
Build a Financial Plan That Works for You
Choosing between paying off debt and investing isn’t a black-and-white decision.
It depends on your interest rates, financial stability, goals, and comfort with risk.
Evaluate your factors, and possibly by combining both strategies, you can build a strong financial plan that supports your short-term peace of mind and long-term wealth.
FAQ
Should I always pay off debt before investing?
- Not always. If your debt has a low interest rate and you have an emergency fund, investing can provide better long-term returns.
Is it smart to invest in Bitcoin while in debt?
- If your debt is manageable and you’re prepared for Bitcoin’s volatility, it can be a great long-term investment.
Can I pay off debt and invest?
- Yes. A hybrid approach is a great choice in certain situations, allowing you to reduce debt while still building wealth.
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