Should You Invest or Pay Down Debt?

BrightPlan is all about helping you set and achieve life and financial goals. As we prioritize these goals, we want to make decisions that maximize the compounding power of your savings.

This leads to one of the most common financial planning questions: Should I invest in the market or pay down debt?

It’s one of my favorite questions because both are great goals. It would be much like my four-year-old trying to decide between eating broccoli or spinach – either decision is a great outcome.

However, choosing between investing or paying down debt is a bit more complicated given all the different investment accounts available and various types of debt.

Everyone Has Different Circumstances

When choosing between investing or paying down debt, there are many variables to examine, including:

• Expected return on investments
• Interest rates on debts
• Tax benefits associated with your debt
• Tax benefits associated with investing
• Matching contributions
• Private mortgage insurance
• Variability of your income
• Number of years to retirement

Understanding these variables can help you arrive at the best solution from a purely mathematical perspective. However, the decision is based as much on your personality as it is the math – after all, we don’t live in a spreadsheet.

Some people will prefer paying down debt to capture a lower, but knowable, return. Others will prefer to invest in order to capture higher, but less predictable, returns.

How to Prioritize Investments vs Debts

Even if there is no one-size-fits-all advice, below is my opinion of how to prioritize investing and debt payment decisions.

1. Contribute to your company’s retirement plan to the level of your employer match.
2. ‍Pay down credit cards and consumer debt with high interest rates.**
3. ‍Make maximum contributions to any tax-advantaged investment accounts.
4. ‍Pay down mortgage debt in which you are paying Private Mortgage Insurance.
5. ‍Pay down high interest mortgage and non-deductible debt.
6. ‍Make investments in accounts with no tax benefits.
7. ‍Pay down low interest mortgage and any tax-deductible debt.

Nearly everyone will encounter a situation in which your money personality will dictate a re-ranking of some categories.

For example, it would be easy to rank #3, #4, and #5 differently. Assuming you are able to meet your regular minimum debt service payments, maxing out tax-deferred accounts can have a strong mathematical advantage depending on your tax bracket and time horizon.

On the other hand, my personal bias towards low levels of debt often makes me want to reshuffle the order of those three and prioritize paying down debt over maxing out retirement accounts. Another option might be devoting your excess cash flow across multiple categories rather than just one.

In these situations, it is important to understand your emotions and perception of financial freedom. Consider ranking your goals in order of importance. Understanding your priorities can help simplify complex decisions.

If you rank your goals with a significant other, then it also facilitates meaningful conversations about your future and can help you come to agreement about what’s most important to you both.

**For the purpose of this list, I consider debt with an interest rate of 6% or higher to be high interest debt. 

A version of this article originally appeared at Forbes.com