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Should You Invest While Carrying Debt?

Smart Choices, Not Urgency

Many people, especially Gen Z and millennials, are eager to start investing early. From trending investing apps to social media tips, there’s a sense of urgency to get ahead, but investing before paying down debt or building financial basics can sometimes create more risk than reward.

Why Debt Should Often Come First

Interest on debt usually outpaces typical investment returns:

• Credit card debt commonly carries APRs above 20%, while long-term stock market returns earn 8-12% on average.
• Student loans average around 5.8% APR compared with a 10.7% historical annual return on the S&P 500. If you’re only carrying lower-rate debt, investing may make sense, but only if other financial foundations are in place.

Fidelity suggests that if your debt interest is above 6%, you should prioritize paying it off before investing, even if you’re tempted to do both.

The Risks of Skipping the Basics

People graduating or moving into different life phases are more likely to juggle multiple financial pressures — student loans, rent, car payments and credit cards — all without an established emergency savings. Jumping straight into investing carries risks:

• Unexpected expenses could push you into more credit card debt.
• Market volatility can create stress when you don’t have financial stability.

Still, some balance is possible. The financial experts at John Hancock note that if your loan rates are under that 6% threshold, it may be smart to invest while continuing to pay off debt.

Setting Priorities

• Build emergency savings. Depending on the phase of life you’re in, aim for at least $500-$1,000 to cover unexpected costs.
• Pay high-interest debt. Focus on credit cards and personal loans first, as those usually carry higher rates.
• Evaluate student loans. If they are above 6%, it could make sense to pay aggressively. If they are below 6%, consider splitting with investments.
• Invest where you get a match. Take advantage of 401(k) employer matches — they’re essentially free money!
• Keep learning. Use budgeting rules like 50/30/20 and explore trusted financial education tools.

A Real-World Example

Imagine someone is carrying $5,000 in credit card debt at 22% APR and also investing $200 per month in stocks. Even with a 10% return, the debts’ interest wipes out any gains made in the stock market. If that same $200 went to paying down the credit card first, the long-term savings could be significant when you factor in interest saved to offer a more flexible budget for investing once the debt is paid off. For lower-rate debts like federal student loans, however, a split approach of investing while paying them off may be more efficient.

Balance Builds Wealth

Investing early can feel powerful, but it works best when you’ve laid a solid financial foundation first. For Gen Z and millennials, paying off high-interest debt and building savings creates the stability needed to invest with confidence. Once the basics are covered, investing becomes not just possible, but sustainable in the long run.

Sources:

https://www.investopedia.com/credit-card-interest-payments-11744612

https://www.truist.com/money-mindset/principles/outsmarting-debt/pay-off-student-loans-or-invest

https://www.fidelity.com/learning-center/personal-finance/pay-down-debt-vs-invest

https://www.johnhancock.com/ideas-insights/how-to-invest-while-paying-off-student-debt.html