- Should I pay off debt or invest?
- Compare the two rates. Clearing a debt is a guaranteed, tax-free return equal to its interest rate; investing is an uncertain return that is higher on average. Above roughly 7 or 8 percent interest, paying the debt usually wins on both maths and certainty.
- Why is clearing debt called a guaranteed return?
- Because the interest you avoid is money you keep, with no risk attached. A 20 percent credit card cleared is a certain 20 percent. No investment offers that certainty, which is why comparing the two on expected return alone understates the case for repaying.
- What return should I assume for investments?
- Long-run global equity returns have historically averaged somewhere around 7 percent a year before inflation, but any individual decade can be far better or far worse. Treat whatever figure you enter as a scenario, not a forecast.
- Does this account for tax?
- No. Investment gains may be taxed depending on where you live and the account you use, while interest you avoid on a debt is effectively tax-free. That asymmetry tilts the comparison further toward repaying than the raw numbers here suggest.