Why “Invest Instead of Paying Off Debt” Rarely Works (The Real Math)

Photo by Vitaly Gariev on Unsplash

Before you take on debt—or keep debt you could pay off—do the real math. Not the hopeful math. The actual math.

There’s a piece of advice floating around that sounds sophisticated but actually makes debt worse for a lot of people. And it often comes from financial advisors who should know better.

Here’s what they tell you:

“Don’t pay off your mortgage early. Give me that money instead—I’ll invest it and make you more than 7%.”

“Keep your low-interest debt. It’s cheap money. Put your cash to work in the market.”

This sounds like what smart, wealthy people do. Advisors say it with confidence.

Here’s why they say it.

Advisors who charge based on assets under management have a built-in incentive. If you use $50,000 to pay off your mortgage, that’s $50,000 they’re not earning fees on. This doesn’t make them bad people—they genuinely believe they can help. But it means their advice isn’t neutral.

And here’s the thing: most advisors don’t think through the complete math. They think about the returns they can generate. They don’t always think about what you’ll pay in taxes on those gains, or what their fees cost you over time.

Let me show you the actual math.

Say you have $50,000 in debt at 7% interest. Your advisor says keep the debt and invest instead.

What paying off the debt gets you: a guaranteed 7% return (the interest you’re no longer paying), tax-free (you don’t pay taxes on money you didn’t spend), and risk-free (the debt is gone, period).

What investing gets you: uncertain returns (could be 10%, could be -10%), taxable gains (when you eventually sell), and fees along the way.

Let’s say the advisor delivers a solid 10% return. Sounds like you’re beating 7%, right?

Not so fast. Capital gains taxes don’t apply every year—they apply when you eventually sell. But that’s the point: the return you’re counting on isn’t fully yours. When you do realize the gain, a meaningful portion goes to taxes (15-20% federal, plus state taxes in many places).

Then there are advisory fees. A 1% annual fee doesn’t sound like much, but over decades it can quietly consume 20-30% of your total investment growth.

And you’re still making payments on the debt while you wait for those gains.

So even with good years in the market, you’re often roughly breaking even with just paying off the debt. And the debt payoff was guaranteed. The investment returns weren’t.

And yes, mortgage interest can be deductible—but for most households today, the standard deduction means that benefit is often smaller than people assume.

Here’s what really gets people: the unrealized gains trap.

They see their investment account go up and think they’re winning. But you haven’t actually gained anything until you sell. And when you sell: you pay taxes on the gain, you lose the position (no more growth from that money), and you STILL have the debt.

The debt payoff is certain, immediate, and tax-free. The investment gain is uncertain, future, and taxable.

“But I doubled my money!” Great. Now sell it. Pay 15-20% in federal taxes. Pay state taxes. Pay your advisor. Now use what’s left to pay off the debt you’ve been carrying the whole time. How much did you actually come out ahead?

For most people, the answer is: you didn’t. Or barely.

When does this strategy actually work?

It can work for ultra-wealthy individuals with access to very low-cost margin debt from brokerage houses—we’re talking millions in assets as collateral. It can work in specific tax situations where the math genuinely plays out differently. It can work with extremely low-rate debt (like 2-3% from the pandemic era) combined with high tax brackets and long time horizons.

If that’s not you—if you’re a regular person with a mortgage or car loan or credit card debt—the “invest instead” advice probably doesn’t apply.

My approach has always been to pay off debt before investing. Not because debt is shameful—it’s not—but because in the vast majority of real-life situations I’ve seen, the “invest instead” math doesn’t meaningfully outperform paying down debt. The guaranteed return of paying off debt beats the uncertain return of investing almost every time.

So what do you do with this?

If your advisor tells you to keep your debt and invest instead, do the math yourself. Include the taxes. Include the fees. Include the risk that the market doesn’t cooperate.

Ask them to show you the numbers after taxes and after their fees. See if it still looks like a good deal.

For most people, most of the time, paying off debt wins.