How this calculator works
Two simple engines run side by side. The debt path simulates month-by-month payoff with your extra cash and totals the interest avoided. The investing path compounds the same monthly amount at your expected return over the comparison horizon. The honest comparison also notes what happens after the debt is gone — the freed-up cash switches to investing on that path, which this simplified view shows as an explanation rather than a third bar.
Example calculation
$26,000 at 8.5% APR with $550/month: paid off in about 4 years 10 months, avoiding roughly $5,800 of interest. The same $550/month invested at 7% for 5 years grows to about $39,400. The investing path shows the higher number — but it carries market risk, while the payoff return is guaranteed and after-tax.
Common mistakes to avoid
- Comparing a guaranteed 8.5% debt return to a risky 7% market return as if they were equal — risk matters.
- Skipping the employer match to attack moderate debt; the match is a bigger, safer return than either path.
- Ignoring the behavioral edge: for many people, a paid-off card that stays paid off beats an optimally invested balance.
Assumptions and limitations
Pre-tax figures, no minimum-payment modeling, constant returns, no amortization schedules for secured debt, no prepayment penalties, and no liquidity or risk-preference weighting. For the full decision framework (not just the math), take the companion quiz.
Frequently asked questions
When is paying off debt better than investing?
When the debt's interest rate clearly beats your expected after-tax investment return, the case closes itself — guaranteed 20% APR payoff versus a risky 7% market return isn't a close call. Below roughly 6% APR, investing usually wins on pure math. In between, the deciding factors become risk tolerance, the employer match you'd capture first, and whether you'll actually invest the freed-up cash after payoff.
Does this account for the tax deductibility of mortgage interest?
No — this is a deliberately pre-tax, simplified comparison. Mortgage interest deductibility effectively lowers a mortgage's true cost for itemizers, tilting the math further toward investing; investment gains also face tax, tilting back. For most moderate-APR unsecured debt (the typical use case), neither effect is decisive. The companion quiz weighs these qualitative factors.
What about the debt snowball versus avalanche?
Avalanche (highest APR first) minimizes interest; snowball (smallest balance first) maximizes the motivational payoff of early wins. Mathematically avalanche wins, behaviorally snowball has evidence behind it. This calculator sidesteps the debate: it prices the total interest on one debt at a time. For multi-debt sequencing, use the credit card payoff calculator.