by Susan Paige
When you’re eager to build wealth and see promising opportunities—like investing in private tech companies or getting in on hot IPOs—it’s tempting to jump in feet first. But if you’re carrying debt, especially high-interest debt, the smartest financial move may be to take a step back and weigh your options. The decision to pay off debt versus invest isn’t black and white; it comes down to the numbers—and your personal financial situation.
Understanding the Math: Interest Rates vs. Expected Returns
At the heart of this decision is a simple concept: opportunity cost. Every dollar you use to pay off debt is a dollar you can’t invest, and vice versa. So how do you know which is better?
Let’s look at a scenario:
- You have credit card debt charging 18% interest.
- You’re considering an investment opportunity you expect to return 10–12% per year.
In this case, paying off your debt is the clear winner. By eliminating an 18% liability, you’re essentially “earning” a guaranteed 18% return on your money. Compare that to the uncertain 10–12% return from an investment, which may fluctuate—or even result in a loss.
Here’s a rule of thumb:
- If your debt’s interest rate is higher than the expected return on your investment, pay off the debt first.
- If your debt has a low interest rate (like a mortgage at 3–5%), and your expected investment returns are substantially higher, then investing might be the better long-term strategy.
Risk and Psychological Considerations
Expected return is never guaranteed. Investing in private markets—especially buzzy tech startups and pre-IPOs—offers the potential for outsized gains, but also involves real risk and long timelines. These assets are illiquid and can be volatile.
Contrast that with debt repayment: it’s a guaranteed return and it also reduces stress and improves your cash flow. Some people prefer the peace of mind that comes from being debt-free, even if the numbers slightly favor investing.
Types of Debt Matter
Not all debt is created equal. Here’s a quick guide:
- High-interest debt (e.g., credit cards, personal loans): Prioritize repayment before investing.
- Medium-interest debt (e.g., car loans, student loans): Analyze based on your investment alternatives.
- Low-interest debt (e.g., mortgages, federal student loans with benefits): More flexibility here—investing may make sense if your expected returns are significantly higher.
A Hybrid Approach: The Best of Both Worlds?
You don’t necessarily have to choose one path. Many people adopt a dual strategy: they make extra debt payments while also investing a portion of their income.
For example:
- Contribute to retirement accounts to capture employer matches or tax benefits.
- Use remaining cash flow to pay down higher-interest debts aggressively.
This balanced method helps you make progress on debt while also participating in potential market gains.
What About Hot Investment Opportunities Like Pre-IPOs?
The allure of private markets is understandable—investing in tomorrow’s giants like SpaceX, OpenAI, or Stripe before they go public can be exciting. But these deals often require:
- Lock-up periods with no access to funds for years.
- Minimum investment thresholds.
- A higher risk tolerance.
If you’re still juggling high-interest debt or don’t have a solid emergency fund, jumping into private investments may be premature. Always consider your financial foundation first.
Conclusion: Make the Right Move for You
There’s no universal answer to whether you should pay off debt before investing. It comes down to:
- The type and interest rate of your debt.
- Your expected investment returns.
- Your risk tolerance and time horizon.
- Your financial goals and peace of mind.
While the siren song of high-growth private tech deals is strong, foundational financial health is your launchpad. Build that first, then deploy capital into more aggressive investments with confidence and clarity.
So, what do you think ?