Investment vs. Debt Payoff: The Calculator That Shows You The Real Numbers
Paying off your car loan early could cost you £23,000. Or save you £12,000. Here's how to know which.
You've got £40,000 in student loans at 4.5% interest. You're saving £800/month. Everyone keeps telling you different things:
- 🏦Your parents: "Pay off debt first! Debt is bad!"
- 📈Your financially savvy friend: "Invest! The market returns 10%!"
- 🤷The internet: "It depends on your interest rate and risk tolerance and tax situation and..."
Generic advice is worthless. Your 4.5% student loan is completely different from your friend's 18% credit card debt or your colleague's 2.5% mortgage.
The answer isn't philosophical. It's mathematical. And once you see the actual numbers for your specific situation, the decision becomes obvious.
The Simple Rule (That Everyone Quotes Wrong)
The Standard Advice:
"If your debt interest rate is higher than investment returns, pay off debt. Otherwise, invest."
Simple, right?
Except this rule is incomplete. It ignores:
Risk
Debt payoff = guaranteed return. Investing = variable returns (might be -20% next year)
Taxes
Investment returns are taxed. Debt interest saved isn't. Your 7% investment might only be 5.5% after tax.
Cash Flow
Eliminating a £400/month debt payment frees up £4,800/year forever. That's flexibility you can't get from investments.
Psychological Peace
Being debt-free feels amazing. That has value, even if it's not optimal mathematically.
The Better Rule:
If your debt interest rate is 2+ percentage points higher than expected investment returns (after tax), aggressively pay off debt. If it's 2+ points lower, invest while making minimum payments. If they're within 2 points of each other, choose based on risk tolerance and psychology.
Disclaimer
This calculator is for educational and informational purposes only. It is not intended as financial, investment, or tax advice. The projections are estimates based on the assumptions you provide and do not guarantee future results. Past performance does not indicate future returns. Investment returns are not guaranteed and may vary significantly. Consider consulting with a qualified financial advisor or tax professional before making financial decisions. This tool does not replace professional financial advice.
The Calculator: See Which Strategy Actually Wins
Stop guessing. Adjust the sliders below to match your situation and watch the two strategies race against each other. The racing paths show net worth over time for both approaches.
💡 Want to use this calculator without scrolling? Use the standalone calculator here →
How to use this calculator:
- Set your total debt amount (student loans, car loans, etc.)
- Enter your debt interest rate
- Set your expected investment return (7% is historical stock market average)
- Watch the race: Red path = aggressive payoff, Green path = minimum payments + invest
- Look for the crossover point (yellow marker) where one strategy overtakes the other
3 Real Scenarios: When Each Strategy Wins
High-Interest Debt: Pay It Off
Scenario:
£8,000 credit card debt at 18% APR. Minimum payment: £200/month. You have £500/month to allocate.
Strategy A: Aggressive Payoff
- • Pay £500/month toward debt
- • Debt-free in 19 months
- • Interest paid: £1,300
- • Then invest £500/month for 8.5 years
- 10-year net worth: £67,000
Strategy B: Minimum + Invest
- • Pay £200/month (minimum)
- • Invest £300/month at 7% return
- • Debt-free in 62 months (5+ years)
- • Interest paid: £4,400
- 10-year net worth: £52,000
Winner: Aggressive Payoff by £15,000
18% interest is brutal. The "guaranteed 18% return" from paying off debt crushes 7% investment returns. Plus, you're debt-free in 19 months vs 5 years.
Low-Interest Debt: Invest
Scenario:
£25,000 car loan at 2.9% APR. Minimum payment: £450/month. You have £800/month to allocate.
Strategy A: Aggressive Payoff
- • Pay £800/month toward debt
- • Debt-free in 33 months (2.75 years)
- • Interest paid: £1,050
- • Then invest £800/month for 7.25 years
- 10-year net worth: £89,000
Strategy B: Minimum + Invest
- • Pay £450/month (minimum)
- • Invest £350/month at 7% return
- • Debt-free in 60 months (5 years)
- • Interest paid: £1,800
- 10-year net worth: £106,000
Winner: Minimum + Invest by £17,000
2.9% interest is cheap money. The 7% investment return (even after tax ~5.5%) beats the 2.9% cost of debt. You pay £750 more in interest but gain £17,000 in wealth.
Middle-Ground: Your Choice
Scenario:
£40,000 student loan at 5.5% APR. Minimum payment: £400/month. You have £800/month to allocate.
Strategy A: Aggressive Payoff
- • Pay £800/month toward debt
- • Debt-free in 59 months (5 years)
- • Interest paid: £6,200
- • Then invest £800/month for 5 years
- 10-year net worth: £57,000
Strategy B: Minimum + Invest
- • Pay £400/month (minimum)
- • Invest £400/month at 7% return
- • Debt-free in 146 months (12 years)
- • Interest paid: £18,400
- 10-year net worth: £60,000
Winner: Nearly Equal (£3,000 difference)
5.5% debt vs 7% returns (5.5% after tax) = basically a wash. This is where psychology matters: Do you hate debt? Pay it off. Want maximum flexibility? Invest. Neither is "wrong."
The Break-Even Point: Where The Answer Flips
The magic number that determines everything: the spread between your debt interest rate and investment return.
The Spread Formula:
Spread > +3%: Invest aggressively (don't pay extra toward debt)
Spread between +1% and +3%: Slight edge to investing, but close call
Spread between -1% and +1%: Roughly equal - choose based on preference
Spread between -3% and -1%: Slight edge to debt payoff
Spread < -3%: Aggressively pay off debt (don't invest until debt-free)
Real Examples:
| Debt Type | Interest Rate | Investment Return (7%) | Spread | Decision |
|---|---|---|---|---|
| Credit Card | 18% | 7% (5.5% after tax) | -12.5% | PAY OFF IMMEDIATELY |
| Personal Loan | 8% | 7% (5.5% after tax) | -2.5% | Pay off debt |
| Student Loan | 4.5% | 7% (5.5% after tax) | +1% | Your choice |
| Car Loan | 2.9% | 7% (5.5% after tax) | +2.6% | Invest |
| Mortgage | 2.5% | 7% (5.5% after tax) | +3% | INVEST |
5 Expensive Mistakes People Make With This Decision
❌ #1: Using nominal investment returns instead of after-tax returns
"The stock market returns 10%, so I should invest instead of paying off my 6% student loan!"
Why it's wrong: You pay 20% capital gains tax on investment returns. That 10% becomes 8% after tax. And 8% vs 6% is close enough that risk matters. Always use after-tax returns for fair comparison.
❌ #2: Ignoring risk differences
"My debt is 5%, investments are 7%, so I'll invest."
Why it's incomplete: Debt payoff = guaranteed 5% return. Investing = potential 7% return (but could be -15% in a bad year). The closer the rates, the more risk matters. 2% extra return might not be worth the volatility.
❌ #3: Forgetting about cash flow flexibility
"Mathematically investing is better, so I'll make minimum debt payments forever."
The trap: You lose your job. You have £50,000 invested but still owe £500/month in debt payments. Your investments can't pay your bills during crisis. Debt elimination = permanent cash flow reduction.
❌ #4: Treating all debt the same
"I should pay off all my debt before investing."
Why it's wrong: Your 18% credit card and your 2.5% mortgage deserve completely different strategies. Aggressively pay off high-interest debt while investing and keeping low-interest debt.
❌ #5: Forgetting about employer match
"I'm going to pay off debt instead of contributing to my pension."
The disaster: You're leaving free money on the table. Employer pension match is an instant 50-100% return. ALWAYS contribute enough to get full match, even if you have high-interest debt. After that, pay off debt.
The Hybrid Approach: Why Not Both?
The binary choice (all debt payoff OR all investing) is a false dichotomy. Consider splitting your extra money:
The 50/50 Split Strategy:
Got £800/month extra? Put £400 toward extra debt payments, £400 toward investing.
Benefits:
- Psychological win: You're making progress on both goals simultaneously
- Risk mitigation: If markets crash, at least you paid down debt
- Flexibility: You can adjust the split as circumstances change
- Compound interest head start: You don't wait years to start investing
- Faster cash flow freedom: Debt eliminated quicker than minimum-only approach
Other Hybrid Variations:
The "Avalanche + Invest" Method
Pay minimum on all debts, put extra money toward highest-interest debt until it's gone, then split between next-highest debt and investing.
The "Match First, Then Debt" Method
Contribute to pension up to employer match (free money), then throw everything at high-interest debt, then increase investing once debt is manageable.
The "Interest Rate Threshold" Method
Aggressively pay off any debt above 6%. For debt below 6%, make minimum payments and invest the rest. Simple rule, easy to follow.
Special Cases & Exceptions
Student Loans (UK)
UK student loans are unique: they're written off after 30 years, and you only repay based on income (9% of earnings above £27,295 for Plan 2).
Strategy:
For most people, never voluntarily repay UK student loans early. The interest rate is high, but most people won't repay the full amount before write-off. Invest instead. Exception: High earners who'll definitely repay in full.
Mortgages
Mortgages have massive tax advantages (mortgage interest relief in some cases) and typically low rates (2-4%).
Strategy:
For most people with sub-4% mortgages, don't pay extra. Invest instead. Exception: If you're 5-10 years from retirement and want the peace of mind, pay it off.
0% Promotional Debt
0% credit cards, 0% car financing, buy-now-pay-later deals.
Strategy:
Always invest while making minimum 0% payments. Free money is free money. Just set a reminder to pay it off before the promotional period ends (or you'll get hit with backdated interest).
Want to Model Your Complete Financial Future?
This calculator showed you debt vs. investment strategies. But what about modeling multiple debts, different investment accounts, retirement goals, and major life purchases all at once?
Our full financial forecasting tool lets you build complex scenarios with multiple debt payoff strategies, investment accounts, and see your complete net worth trajectory over 10-30 years.
Frequently Asked Questions
What if I have multiple debts at different interest rates?▼
Use the "avalanche method": pay minimums on all debts, put extra money toward the highest-interest debt first. Once that's gone, move to the next-highest. While doing this, compare your highest-interest debt rate to investment returns. If it's >7%, focus on debt. If it's <5%, consider splitting between debt and investing.
Should I stop contributing to my pension to pay off debt?▼
Never stop contributing up to the employer match. That's an instant 50-100% return - better than any debt payoff. After the match, it depends: if you have high-interest debt (>7%), pause extra pension contributions and attack the debt. If it's low-interest (<5%), keep contributing to pension while making minimum debt payments.
What about the emotional benefit of being debt-free?▼
It's real and valuable. If debt keeps you awake at night, pay it off even if investing would be mathematically better. Financial peace has value that spreadsheets can't capture. That said, try to separate "high-interest debt I hate" from "low-interest debt that's fine." You can be debt-free on credit cards while keeping a cheap mortgage.
Can I do both simultaneously?▼
Absolutely! The 50/50 split is popular: put half your extra money toward debt, half toward investing. You get the psychological win of progress on both goals, plus you hedge your bets if markets crash or circumstances change. It's not "optimal" mathematically, but optimization isn't everything.
What about using savings to pay off debt all at once?▼
Keep your emergency fund untouched. Never drain savings to £0 to pay off debt. Keep 3-6 months expenses in cash, then use surplus savings for debt if the interest rate is high (>7%). If the interest rate is low, keep the savings invested and pay debt slowly.
How do I calculate my after-tax investment return?▼
Simple formula: Nominal return × (1 - tax rate). If you expect 8% returns and pay 20% capital gains tax: 8% × 0.8 = 6.4% after-tax return. Use this for fair comparison against debt interest rates. Note: returns inside ISAs and pensions are tax-free, so use the nominal rate for those.
The Bottom Line
The debt vs. investment question isn't philosophical. It's mathematical. And the math depends entirely on your specific numbers.
The Decision Framework:
Debt interest > 7%: Pay it off aggressively
Debt interest 5-7%: Your choice (slight edge to debt payoff)
Debt interest 3-5%: Your choice (slight edge to investing)
Debt interest < 3%: Keep the debt, invest instead
But remember: this assumes you're comparing against ~7% investment returns (after tax). If you're conservative and expecting 5%, adjust the thresholds down. If you're aggressive and expecting 10%, adjust up.
The calculator at the top of this page will tell you exactly which strategy wins for your situation. No more guessing, no more generic advice, just your specific numbers.
And if the math says they're roughly equal? Then it's not a math decision - it's a values decision. Choose the path that helps you sleep at night.
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