Should You Pay Off Debt or Invest First?

The Three Things That Actually Matter

1. What Is Your Debt Really Costing You?

Start with the basics. What interest rate are you paying?

If your debt costs you 8% a year and your investments are expected to earn around 7%, paying off the debt first would make sense. You cannot reliably earn more than what the debt is taking from you.

If your debt is a mortgage at a low rate and your investments could realistically earn 7–8% on average over time, the math starts to favor investing. You are effectively borrowing at a low cost and putting that money to work at a higher rate.

One thing worth keeping in mind: investment returns are estimates. Your debt payments are fixed and certain. When you are not sure, paying down debt is the more prudent path.

2. How Much Cushion Do You Have?

This is the question most people skip — and it is the one that matters most.

Before deciding anything else, ask yourself honestly: if your income stopped tomorrow, how long could you cover your bills?

In Wealth and Family, Rodrigo is direct about this: before thinking about growing your money, make sure you understand your commitments and what your life actually costs. If you invest without enough of a cushion and something goes wrong — a job loss, a health issue, an unexpected expense — you will be forced to sell your investments at the worst possible moment.

The practical starting point: keep at least 3 to 6 months of your regular expenses in a savings account or something equally easy to access. If you do not have that yet, building it comes first — before paying down debt aggressively or investing.

We all want to earn a good return on our investments, but keep in mind that making debt payments requires having the liquidity available to do so.

Once that cushion is in place, the decision becomes much clearer.

3. What Kind of Debt Is It?

Not all debt is the same — and this distinction changes the answer completely.

Some debt is productive. You borrow to acquire something that generates value — a business, a rental property, education that increases your income over time. When what you financed earns more than the debt costs you, the borrowing made sense.

For most people, taking on a mortgage they can comfortably afford to buy a home is another example of productive debt, because over time they build equity, often benefit from capital appreciation, and gain the peace of mind that comes with owning a place to live.

Some debt is corrosive. Credit cards, personal loans for things you have already consumed, or financing for a car above your budget that loses value every year. There is nothing working on your behalf to offset the interest. This is the debt that quietly drains your wealth month after month.

If your debt is corrosive — especially at high interest rates — pay it off before you invest. There is no investment that reliably and sustainably outperforms the interest charged by credit cards.

If your debt is productive and carries a low rate, the calculation changes. But only after your cushion is solid.

Three Questions to Ask Before You Decide

Before making any move, get honest answers to these three questions:

• Do I have at least 3 to 6 months of expenses set aside in accessible savings? If not, this comes first. Everything else is secondary until that cushion exists.
• What is my debt actually costing me — and is it productive or corrosive? Has the return on what you financed with this debt been consistently higher than the interest rate you are paying? If so, investing in parallel often makes sense. If not, and especially if the difference is substantial, most people benefit from paying down aggressively high-cost corrosive debt.
• What return am I realistically expecting from my investments — not hoping for? Since debt payments are typically fixed amounts, both the expected return and the reliability of that return matter equally. A better question: do I understand — and how familiar am I with — the risks I am taking? Be honest with yourself. All investments carry risks. Get familiar with those risks, as well as with your own characteristics as an investor. If you do not have much experience or knowledge about investing, the most prudent path may be to reduce — or even eliminate — your level of debt first.

The Scenario That Catches Most People Off Guard

Here is the situation Rodrigo has seen repeat itself many times: someone has a low-interest loan and decides to invest instead of paying it down. The logic makes sense on paper. Then something unexpected happens — a job loss, a medical bill, a market drop — and they are forced to sell their investments at a loss just to keep up with the debt payments.

As Rodrigo writes in Wealth and Family: when things do not go as planned, debt has the capacity to erase part of your wealth. Your ability to pay — not just today, but if things get harder — should feel comfortable before you decide to invest instead of paying down debt.

This is not an argument against debt. It is an argument for making this decision from a position of genuine financial strength, not wishful thinking.