Payoff vs Invest (USA)
Compare net worth impact of prepaying debt versus investing extra cash.
📖 How the net-worth comparison works
Two paths forward over the same horizon. In the payoff path, extra monthly dollars go to principal; the loan shrinks faster and you save interest. In the invest path, the same dollars buy an investment that compounds at an assumed return while the loan runs its normal schedule.
The calculator reports net worth at the end of the horizon for both paths and the dollar difference between them. A positive difference means investing beat debt payoff; negative means payoff won.
Payoff path
Guaranteed return equal to the loan rate. No market risk, no taxes on interest saved. Less liquid — cash is committed to principal.
Invest path
Probabilistic return. Historical equity returns beat most loan rates, but any single window can underperform. More liquid.
📊 The first-order rule: compare rate to expected return
If your loan rate is clearly above a reasonable expected return (credit cards at 15-25% for example), payoff wins by a wide margin on both math and certainty. No serious comparison needed.
If the loan rate is clearly below (3% mortgage vs expected 7% equity return), investing usually wins in expected value. Even adjusting for taxes and sequence risk, the gap is usually too wide for payoff to catch up.
The middle zone (5-7% loans vs similar expected returns) is where individual circumstances — tax situation, risk tolerance, account type — decide the winner.
🎲 Why risk tolerance and taxes flip the answer
Certainty premium
Payoff returns are guaranteed. Risk-averse borrowers may prefer a certain 6% over an expected 7% with volatility.
Tax drag on investments
Gains in a taxable account are often taxed at 15-20%, turning a 7% gross return into ~5.6% after tax. Include this in the comparison.
Retirement accounts change math
401(k) or IRA shields gains from current tax, often making investing more attractive — if you can leave the money locked up.
Mortgage interest deduction
Only relevant if you itemize. Post-TCJA, most US households take the standard deduction, so the deduction often has no real impact.
❓ Frequently asked questions
Should I pay off high-rate credit cards first?
Almost always yes. Credit card rates (often 18-25%) are far above any reasonable expected return. Pay those off before considering investing extra cash.
What about a mixed strategy?
Often the best answer in practice — keep an emergency fund in cash, pay off high-rate debt, and direct the rest toward long-horizon investing. Ultra-low-rate debt is often worth keeping while investing.
How do I handle uncertain investment returns?
Run the calculator at bearish (3-4%), base (6-7%), and bullish (9-10%) return assumptions. If payoff wins the bearish scenario and investing wins the bullish, your risk tolerance decides.