Member Sign In

You've got some extra cash — maybe it's a bonus, an inheritance, or just a lucky break.

Now, what do you do with it?

That's exactly where my friend Paul found himself a few years ago. He and his wife were staying with us for the weekend to attend a funeral for his great uncle. Later that evening, as the four of us were sitting around the dining room table, sipping margaritas, Paul got a phone call. As he hung up, he had this dumbfounded look on his face.

His great uncle had left him $10,000 in his will.

Naturally, we started talking about what we'd each buy if we had ten grand burning a hole in our pockets. We tossed out ideas (golf cart, new art, that dream vacation), laughed, and dreamt a little. But the conversation soon turned serious. Paul and his wife had an opportunity to cross off one of their big financial goals, but they were torn — should they invest the money in the stock market or pay off their lingering credit card debt?

It's a dilemma many people face when extra money unexpectedly falls into their laps. Do you go the responsible route and knock down that stack of debt? Or should you let that money work for you, giving it a chance to grow into something bigger?

Let's dive into both sides.

The Case for Paying Off Debt

Paying off debt is one of the most satisfying financial moves you can make. There's something undeniably freeing about watching the balance shrink, knowing you're no longer chained to those interest payments.

And when it comes to high-interest debt — especially credit cards — it's hard to argue against prioritizing paying it down whenever you can. The average credit card APR is over 24%, which means for every month you don't pay it down, that balance is ballooning.

Paying off a credit card with a 20% interest rate is like earning a guaranteed 20% return on your money, with no market risks or fluctuations to worry about. Not many investments can consistently offer that kind of return.

But not all debt is created equal. What if your debt's interest rate is more moderate — say, in the 7% to 10% range? That's still substantial, but it's not as crushing as high-interest credit card debt.

In these cases, you'll need to weigh the benefits of paying off that debt against the potential returns from investing. The stock market has historically returned around 7% to 10% annually, so you're in a gray area where either option could make sense depending on your comfort with risk.

Then there's student loan debt, which usually carries a much lower interest rate, often in the 3% to 6% range. With rates this low, you might want to prioritize investing over paying down those loans — especially if your goal is long-term growth. However, if you're motivated by the emotional relief of reducing your overall debt burden, paying off student loans might feel like the right move for you.

The key takeaway? Different types of debt require different strategies. High-interest debt should take priority, but for moderate or lower-interest debts, the decision becomes less clear-cut. It's all about your personal situation — what makes sense for your goals, risk tolerance, and financial future.

Don't forget the impact on your credit score, either. Paying down debt, particularly revolving debt like credit cards, improves your credit utilization ratio, which is a big factor in boosting your score. A better credit score means access to lower interest rates on future loans, easier approval for mortgages, and even better deals on things like car insurance.

And there's the emotional side of things, too. Debt can weigh you down mentally, creating stress and anxiety. Eliminating that burden can give you peace of mind — something that's hard to put a price on.

The Case for Investing

Investing, on the other hand, is how you take that extra cash and make it grow. This is where wealth is built — by putting your money into assets that appreciate over time, like stocks, bonds, or mutual funds. Sure, paying off debt feels good, but investing is where the long-term magic happens.

Let's say you have relatively low-interest debt, like a mortgage at 4%. If the stock market is averaging a 7% to 10% return annually (as it historically does), it might make more sense to invest rather than throw all your money at the debt. Over time, the compounding power of investments can outpace the interest you're paying on that low-interest debt.

Here's where it gets interesting: Investing is about taking calculated risks. The stock market fluctuates, and there's no guarantee of consistent returns. Some years are great, others... not so much. If you can stomach the volatility and think long term, investing can be an incredibly powerful tool to grow your wealth.

But it's not just about the numbers. Investing also represents something bigger — the chance to build. Whether you're saving for retirement, putting away money for your kids' education, or just trying to reach a financial goal, investing gives your money a purpose beyond the present moment.

That said, investing requires patience and a bit of risk tolerance. If you're someone who loses sleep over market dips, throwing all your extra cash into the market might not be the best fit. But for those who are willing to ride out the ups and downs, the rewards can be substantial over time.

Can You Do Both?

The good news? You don't have to choose just one. Sometimes, splitting the difference can be the best strategy. Why not pay down some of that high-interest debt and invest a portion of your extra cash? This way, you're working toward reducing your financial obligations and growing your wealth at the same time.

But before doing anything, there's one key thing to consider: Do you have an emergency fund? This is the cornerstone of any solid financial plan. If life throws you a curveball — like a medical emergency or car repair — you'll need cash on hand to deal with it. Ideally, you want three to six months of living expenses tucked away in a safe, accessible account before focusing on debt repayment or investing.

Once your emergency fund is in place, you can adopt a balanced approach. Maybe 50% goes toward paying off high-interest debt, and the other 50% gets invested in a diversified portfolio. Or perhaps you allocate 30% to debt and 70% to investing, depending on your financial goals. The beauty of this strategy is that it doesn't force you into a corner — you can benefit from the security of paying off debt while also putting your money to work.

6 Key Questions to Help You Make the Best Financial Decision

As you can see, there isn't one "right" answer. Both paying off debt and investing have their benefits — and, yes, part of it comes down to math — but, ultimately, it's all about figuring out what makes sense for you and your life.

So, if you find yourself with some extra money, how do you decide what's best for you? Here are a few questions to help guide your decision...

1) Do I have an emergency fund?

If not, that should be your top priority. Without a financial buffer, any unexpected expenses — like medical bills or car repairs — could force you to rely on credit cards or sell investments at a loss, undoing any progress you've made. A solid emergency fund helps prevent this, giving you the security to focus on debt or investing.

2) What's the interest rate on my debt?

If your debt carries a high interest rate (think 7% or more), paying it off likely provides a better return than investing. In comparison, most investments can't guarantee such a high return, so eliminating expensive debt often makes more financial sense.

3) How does my debt impact my credit score?

Paying off debt can improve your credit score by lowering your credit utilization ratio. A higher score can open up better financial opportunities, such as lower interest rates on loans and mortgages, saving you money in the long run.

4) What are my financial goals?

If you're saving for a big purchase like a house or aiming for early retirement, investing might align better with those goals. However, if improving your credit score or lowering your debt-to-income ratio will help you achieve those goals, paying off debt could be a smarter move.

5) What's my tolerance for financial risk?

Investing comes with the possibility of market volatility, so if risk makes you uneasy, paying off debt might offer peace of mind. Understanding your risk tolerance helps you make financial decisions you can feel confident about, whether it's eliminating debt or growing your wealth.

6) Am I motivated by security or growth?

Some people are more comfortable with the certainty of paying off debt, while others are driven by the potential to grow their wealth through investing. Identifying which motivates you can help clarify where to put your extra money.

Paul and Kate Found Their Answer — What Will Yours Be?

For Paul and Kate, paying off the rest of their high-interest debt ended up being the clear choice, especially since they were hoping to buy a house soon, and that could help boost their credit score.

It wasn't the most exciting choice, but it was the surest win. And the right one for them.

And for you? At the end of the day, whether you decide to pay off debt, invest, or do a combination of both, the most important thing is that you're moving forward. There's no wrong choice as long as it aligns with your financial goals and personal circumstances.

By paying down debt, you free yourself from the financial burden of interest. By investing, you're giving your money the chance to grow over time. Whichever route you take, you're setting yourself up for greater financial security.

And remember — either choice brings you closer to where you want to be.