Balancing priorities: Pay down debt or invest?

Key Points

  • Paying down debt and investing can help you feel more financially secure.
  • Doing both at the same time is common.
  • Your Ameriprise advisor and your tax professional can help you make choices that are appropriate for your goals, financial situation and risk tolerance.


“Should I pay down my debt or invest for retirement and other goals?”

It’s a frequently asked question, no doubt driven by the desire to feel more financially secure. Your Ameriprise advisor can assess your situation and help you appropriately prioritize paying down debt as well as saving and investing to achieve your financial goals. Here are three factors that may influence your decisions. 


Your cash reserve. A major house repair, a job loss or a large medical or dental expense: Emergency and urgent short-term needs are inevitable. A cash reserve can help you pay for them — and stay on track with your long-term goals. Most financial professionals suggest that ideally your cash reserve would cover three to six months of living expenses. Your advisor can recommend a specific amount based on your financial picture. 


Interest rates. The average interest rate for U.S. credit cards is roughly 15% this year.1 The average annual return for the S&P 500® Index is roughly 10%.2 Paying off high-interest debt — even if you have to delay investing — might be the smarter financial choice. Your advisor can help you do the math based on your situation.


For lower-interest debt such as a mortgage or student loan, a good rule of thumb is that if you could reasonably earn more from investments than you would pay in loan interest, it may be better to continue investing and pay off the debt later. Here’s an example:



Source: Amortizing Loan Calculator and Compound Interest Calculator The $64,000 in earnings is for a tax-deferred account (a taxable account would result in $42,000 in earnings). This example is not meant to represent any specific investment and does not consider fees or other expenses.


Taxes. Given the tax aspects of mortgage and student loan interest, you may want to consult both your financial advisor and a tax professional. It’s important to factor potential tax advantages when deciding whether to pay off loans early.


Your Ameriprise advisor is here to help


Keep in mind that your choices don’t need to be either/or: You could use a portion of your cash to become debt-free at the same time you save for retirement and other long-term goals. Your advisor can help you with a personalized approach as well as refer you to a tax professional.