Pay Off Debt or Invest? How I Make the Decision
December 8, 2021
Should you pay off debt or invest? If the debt is expensive, the arithmetic can be fairly clear. The harder part is often getting somebody to follow a plan consistently when paying down a balance feels less exciting than building an investment pot.
That was the question behind my December 2021 video. A viewer, Jamie, asked whether he should use the money left at the end of each month to reduce his credit-card debt or start investing. We discussed his example with his permission, and it led me into a wider question about motivation.
My view was that the numbers matter, but so does the behaviour needed to improve them. I wouldn’t want somebody to use motivation as an excuse to ignore expensive debt. Equally, a technically neat plan isn’t much use if they never act on it.
You can also watch my original debt-versus-investing discussion.
The example that started the conversation
Jamie described a £5,000 credit-card balance at about 20% APR. He was making the minimum payments, but the debt wasn’t reducing at the pace he wanted. After his bills and other regular spending, he had around £150 a month left.
At the same time, he wanted to open an ISA and start investing in index funds. In his mind, an investment pot represented progress towards becoming wealthier. Paying the credit card felt much less positive, even though reducing the debt would improve his finances.
That emotional difference was what interested me. Two actions could both strengthen his position, but one felt like building something and the other felt like clearing up the past. If the second action didn’t motivate him, the plan needed to address that honestly.
The figures were his historical example, not a recommended debt level or a universal repayment schedule. I didn’t have a complete breakdown of his minimum payments in the video, so it wouldn’t be appropriate to turn the discussion into an exact payoff date.
Why the interest rate matters so much
A 20% borrowing cost is a significant hurdle for an investment to overcome. Paying down that balance reduces the debt on which interest is charged, subject to the account’s terms. An investment return, by contrast, is uncertain and may be negative.
In the original conversation, we used a possible 10% investment return as a comparison. That was an assumption for discussing the arithmetic, not a guaranteed annual return from an index fund. It shouldn’t be treated as money that will reliably arrive to offset the credit-card interest.
Even if an investment has produced a particular average over a long period, it won’t necessarily produce that result next year. The sequence of gains and losses matters, especially if you may need the money while debt payments continue.
That’s why I wouldn’t compare a known borrowing rate with an optimistic return as though both were equally dependable. The debt cost and the investment outcome have different levels of certainty, different timing and potentially different tax or fee effects.
The basic point in Jamie’s example was straightforward: reducing very expensive debt deserved serious priority. Wanting to become an investor didn’t make the existing interest bill disappear.
Debt repayment is progress towards wealth
One way to make the decision clearer is to look at the whole financial position. If you owe less, your net position improves even if there isn’t a new account showing a growing investment balance.
For example, reducing a debt by £100 improves the difference between what you own and what you owe by £100, before considering the interest saved. It may feel less exciting than buying an investment, but it is still movement in the right direction.
That perspective doesn’t solve every motivational problem, but it can help. Rather than describing repayment as something that happens before the wealth-building journey starts, it can be understood as part of that journey.
I would still keep the practical cash position in view. A plan needs to meet required payments and essential costs. It also needs to consider how an unexpected expense would be handled, otherwise one repair or bill can push the balance back up.
The FCA’s guidance on whether you’re ready to invest prioritises addressing short-term debt and building accessible emergency money. That’s useful context alongside the personal motivation discussed in my video.
Snowball and avalanche approaches tackle different problems
I discussed two common ways of prioritising debts. The snowball approach starts with the smallest balance, while maintaining the required payments on the others. Clearing a whole debt can provide an early sense of progress.
The avalanche approach directs extra repayments towards the highest interest rate first, again maintaining required payments elsewhere. With otherwise comparable terms, that approach generally reduces interest more efficiently because the most expensive balance is being tackled first.
My instinct is more mathematical, so I lean towards examining the highest APR. But I can understand why somebody might respond better to the visible achievement of eliminating a smaller balance. The behavioural benefit is the argument for the snowball approach.
I’d make the trade-off explicit. Choosing the smaller balance for motivation may mean paying more interest overall than a highest-rate-first plan. That doesn’t make the motivation imaginary; it means you should understand the cost of the choice rather than assume the two methods are financially identical.
There can also be account-specific details, promotional periods or consequences of missed payments. A simple ranking by balance or APR doesn’t replace understanding the actual terms and keeping essential obligations up to date.
Why I wouldn’t use a fixed investment-return threshold
In the video, I discussed the idea of comparing lower-cost debt with a potential investment return. That was part of explaining my thinking, but a fixed rule such as keeping every debt below a particular percentage would be too crude.
An assumed market return isn’t guaranteed, and a debt can create cash-flow pressure even when its rate appears relatively low. Fees, tax, changing interest rates and the time available can all alter the comparison.
I’d also distinguish an ordinary expensive credit-card balance from a carefully assessed loan supporting an income-producing asset. Both involve debt, but the purpose, security, repayment terms and consequences can be very different.
For property, the borrowing needs to be considered with the investment’s income and costs. My buy-to-let mortgage guide discusses that wider context. It isn’t enough to say that the property might rise faster than the interest rate.
The question I want answered is whether the arrangement remains manageable if the hoped-for return doesn’t arrive. A plan that relies on a favourable market every year leaves little room for real life.
The bigger opportunity was increasing the monthly surplus
As our conversation developed, I asked whether Jamie could increase the amount available each month. We moved from debating how to divide £150 to considering whether additional work could create a larger surplus.
He said an extra shift could potentially leave him with roughly £400–£500 a month to direct towards his goals. That changed the discussion. There might be more room to reduce the debt and still see visible progress elsewhere.
Those were possibilities discussed in the conversation, not a claim that he subsequently took the shifts, invested a particular amount or achieved a particular result. The useful point was that the size of the surplus had become another variable, rather than something we accepted as fixed.
Of course, extra work isn’t available or appropriate for everyone. Health, caring commitments, existing hours and the actual pay after costs all matter. The principle is to investigate realistic ways of widening the gap between income and spending, not assume everybody can simply work more.
It can also be worth examining spending, but the same realism applies. If the budget already covers little beyond essentials, telling somebody to cut more may not create the answer. The options need to fit the actual household.
Motivation can help create that extra effort
My interest was in what would make the extra effort worthwhile to him. If seeing an investment account grow encouraged him to earn more, that motivation could affect the amount available to tackle the whole problem.
I said that, in a similar position with a larger surplus, I could imagine wanting to see an investment pot grow as the debt came down. I also acknowledged that splitting the money could be less efficient mathematically than concentrating on the expensive debt.
That was a personal reflection, not a prescription for somebody else to invest while carrying a 20% credit-card balance. The distinction matters. A behavioural idea still needs to be weighed against the interest cost and the risk of losing invested money.
I wouldn’t invent a universal split such as half for repayment and half for investing. The video didn’t establish one, and the appropriate decision would depend on the person’s wider finances. The point was to understand what behaviour the plan was likely to produce.
A useful plan should also be reviewed. If a small investment contribution doesn’t actually improve motivation, the justification for paying extra debt interest becomes weaker. The intended psychological benefit shouldn’t be assumed without looking at what happens.
Make the progress visible whichever route you choose
If reducing debt feels unrewarding, there are ways to make the improvement easier to see. Track the remaining balance, the amount repaid and the monthly commitment that will eventually be released. Those are concrete measures of progress.
I would separate the required payment from any extra amount directed towards the balance. That makes it clearer whether the debt is shrinking because of a deliberate plan and whether new spending is undoing the work.
I’d also keep the longer-term objective visible. The reason for improving the finances might be more choice, less pressure or eventually building investment income. Connecting today’s payment with that objective can make it feel less like an isolated sacrifice.
My property investment planning article starts with the outcome you’re trying to achieve. The same idea is useful before buying property: understand the destination, then work out the steps your current finances can support.
If you’d like to explore the saving side, our compound interest calculator shows how contributions and time affect an illustrative balance. It doesn’t compare debt repayment automatically. I’d still assess the known borrowing cost separately from an uncertain investment return, allowing for tax, fees and an emergency reserve.
The answer needs both arithmetic and follow-through
Jamie’s question could have ended with a comparison of two percentages. But the conversation became more useful when we examined why one action motivated him, what extra effort he could realistically make and how that might improve the overall position.
I still wouldn’t brush aside the cost of expensive debt. Reducing it can be a powerful financial step, and uncertain investment returns shouldn’t be used to disguise a certain interest burden. The behavioural discussion sits alongside that reality.
For me, the aim is a plan that improves the numbers and is sustainable enough to follow. Sometimes that means making debt repayment feel like the positive progress it really is. Sometimes it means finding a realistic way to increase the surplus before worrying about a complicated investment strategy.
If you’d like to discuss how your longer-term property plans fit together, book a free 30-minute call. You can also explore the Starter Club or find out about Done For You.