Pay Off Debt or Invest First? A Practical Guide to Smarter Money Decisions

When you're working to build a solid financial future, one of the most important decisions you'll face is whether to pay off debt or start investing. Both options offer compelling benefits—and choosing the right path depends on your financial situation, your goals, and how much risk you’re comfortable taking.

In this guide, we’ll explore the pros and cons of each approach, share some personal experiences, and highlight how geography (US vs. Europe) can play a surprising role in what’s “smart.” Choosing the right path for yourself can make your FIRE journey much more enjoyable.

💸 Why you Pay Off Debt first

High-Interest Debt Is a Wealth Killer

If you're carrying high-interest debt—like credit cards or short-term loans—paying it off should be your top financial priority.

In the U.S., credit card interest rates often exceed 20%, making it nearly impossible for investments to keep up. Even solid stock market returns of 7–10% per year can’t outpace this kind of debt.

In Europe, credit card debt is less common—but new forms of consumer debt are on the rise. Services like Klarna and peer-to-peer lending platforms are becoming popular, often leading to hidden fees or steep interest rates. These can be just as damaging to your financial health.

“You can't invest your way out of high-interest debt.”

Bottom line: Any debt with a double-digit interest rate is likely costing you more than you could earn through investing. Paying it off first is usually the smarter move

Debt Is a Mental and Emotional Weight

Debt isn’t just a numbers game—it impacts your mental health, too. Studies show that debt contributes to stress, anxiety, and even depression, making it harder to focus on long-term planning or enjoy everyday life.

Speaking from experience: we do use debt ourselves—but only for investments or assets, not liabilities. Our car loan is the only real exception (and yes, it wasn’t our smartest choice financially).

Read here how we use private money loans to invest

The Dave Ramsey Method (with Caveats)

Financial expert Dave Ramsey strongly advocates for paying off all non-mortgage debt before investing. His “debt snowball” strategy—tackling the smallest debts first for quick wins—has helped millions stay motivated and get results.

We don’t agree with all his advice (especially his strong push for mutual funds), but when it comes to eliminating debt, Ramsey’s approach is highly effective. And honestly, you can’t build wealth if you’re buried in interest payments.

See why we prefer ETF's over Mutual funds.

📈 Why You Might Want to Invest First

While aggressive debt repayment works well in many cases, there are situations where investing first actually makes more sense—especially mathematically.

Investing Can Outpace Low-Interest Debt

If your debt has a low interest rate—say, a student loan at 3–5%—it might be smarter to invest instead. The stock market's historical return (7–10%) can beat that debt, leaving you better off over time.

⚠️ Caveat: If your student debt impacts your ability to buy a home (as it does in some European countries), it might still be wiser to pay it down first.

Compound Interest Rewards Early Investors

The earlier you start investing, the more time your money has to grow through compound interest. Starting just five years earlier can lead to hundreds of thousands more at retirement.

That said, we personally find this argument a bit weak if you’re buried in high-interest payments. Paying off debt reduces your fixed costs—and once you're free, you can invest more aggressively later.

Employer 401(k) Matches = Free Money

If you're in the U.S. and your employer offers a 401(k) match, contribute enough to get it. It’s essentially free money—a guaranteed 100% return on your contribution up to the match limit.

We completely agree with this strategy.

But note: in countries like the Netherlands, there’s no 401(k)-style match. Instead, pensions are mandatory, and both employer and employee contribute a set percentage to a pension fund. The good news? It’s automatic and protected—you can’t spend it early, which benefits many people who might otherwise under-save or withdraw too soon.

⚖️ Finding the Right Balance: A Hybrid Approach

As with most things in personal finance, the best strategy is often a balanced one.

Here’s a framework to consider:

• Pay off high-interest debt first (anything over 6–7%).

• Make minimum payments on lower-interest debt while investing in retirement accounts.

• Contribute to employer-sponsored retirement plans—especially if there's a match.

• Once high-interest debt is gone, increase your investment contributions.

This approach gives you the best of both worlds: reduced financial stress and long-term wealth growth.

🧠 The Psychological Shift: Why Becoming Debt-Free Matters

Beyond the numbers, there’s a mindset shift that happens when you pay off debt. Suddenly, your money feels like yours again. You're no longer sending a chunk of your income to banks every month—and that financial freedom opens up possibilities:

• Investing more confidently

• Pursuing new career opportunities

• Starting a business

• Buying assets instead of paying for past decisions

Debt-free living isn’t just about dollars—it’s about options and freedom.

💬 What’s Right for You?

There’s no one-size-fits-all answer. Your decision should be based on:

• The type and size of your debt

• Your investment opportunities

• Your country's financial systems and incentives

• Your emotional relationship with money

So what’s your strategy? Have you prioritized debt repayment, early investing, or a mix of both? Share your story in the comments and help others learn from your experience.