Loan vs Investment Calculator: Deciding Between Debt Repayment and Investing

Personal finance decisions don’t get much more critical than choosing between paying off debt or investing extra cash. Both can put you on stronger financial footing long-term. So how do you decide which is the better move for your money?

That’s where a loan vs investment calculator comes in handy. This type of calculator looks at your specific debt, investment, and financial details to determine the mathematically optimal path.

In this post, we’ll explore:

• How a loan vs. investment calculator works
• Key factors that impact the pay off debt or invest decision
• Pros and cons of focusing on debt repayment
• Pros and cons of prioritizing investments
• Strategies for splitting money between debt and investing
• Examples of when to pay debt or invest
• How to choose the best calculator for your situation

Follow along for a comprehensive guide on using loan vs. investment calculators to maximize your money.

How Does a Pay Off Debt vs Invest Calculator Work?

This type of calculator takes several inputs:

• Your current debt details including interest rates and balances
• The type of account you would invest extra funds in and its estimated return rate
• Your tax rate

Using this data, the calculator forecasts and compares two scenarios:

1. You put all extra money toward paying off debts in order from highest to lowest interest rate

2. You invest all surplus income into the investment account

It projects the timelines and totals for each approach. This shows which option saves more money in interest and grows wealth faster long-term.

Advanced versions factor in the tax benefits of interest deductions on debts like mortgages and investment earnings being taxed as income.

Ultimately, the calculator tells you whether eliminating debt or investing will get you to zero debt and maximize net worth the fastest.

Key Factors in the Invest vs Pay Debt Decision

Several variables impact whether debt repayment or investing wins out as the better use of extra cash.

1. Interest Rates

The rates on both debts and investments heavily influence the payoff vs invest decision.

Higher interest debt – The higher the interest rate on a debt, the more benefit there is to knocking it out fast with extra payments. High rate debt grows rapidly, so eliminating it quick saves more on interest.

Lower return investments – If the expected investment returns are lower than debt rates, it makes sense to pay off debt before investing since you reduce interest costs faster than investment earnings.

Higher return investments – When you can realistically earn higher returns investing than debt interest rates, investing tends to come out ahead. Your money grows faster invested than it saves on interest repayment.

2. Investment Risk

All investments carry some risk which debt repayment does not. Paying off guaranteed fixed rate debts provides a lower-risk “return” equal to the interest rate.

If your risk tolerance is lower, eliminating debt may appeal over uncertain investment returns. If you have a higher risk appetite, you may lean towards earning investment returns over a sure thing debt interest rate.

3. Tax Implications

Taxes also sway the pay down debt vs invest decision:

• Interest on mortgages and investments returns are tax deductible or deferred providing savings.

• Investment earnings are taxed at capital gains rates while debt interest reduces taxable income.

For high tax bracket filers, deductions have more benefit making investing more attractive. For lower income filers, reducing taxable income with interest deduction provides less advantage.

4. Time Horizon

Your investing time horizon also factors in. Eliminating debt quickly frees up cashflow for the short term. But investing drives long term growth.

If you need cash flow relief as soon as possible, debt repayment may win out. But with a longer horizon, the compound growth from investing adds up.

Calculate for your specific time frame.

Pros of Paying Off Debt First

Prioritizing your extra money for debt repayment has several potential benefits:

Reduced Interest Costs – Every extra dollar toward debt principal saves on future interest expense. This provides a guaranteed “return” equal to the debt’s rate.

Frees Up Cash Flow – Eliminating debt payments in your budget makes room for future investing capacity.

Reduced Risk – Paying down debt brings guaranteed savings without investment risk.

Peace of Mind – Becoming debt free reduces stress and provides financial flexibility.

Credit Score Boost – Paying down credit accounts can improve your credit utilization and history, boosting scores.

Cons of Paying Off Debt First

Focusing solely on debt repayment also comes with drawbacks:

Missed Investment Returns – Money put toward debt instead of investing misses out on potential returns.

Slower Net Worth Growth – Paying off debt alone builds net worth slower than well-invested savings.

Longer Debt Term – Stretching out lower-rate debts leaves you paying more interest longer.

Inflexibility – Being debt free and cash poor leaves little access to low-cost leverage options.

Lower Tax Deductions – Eliminating deductible interest debt reduces tax deductions.

Pros of Prioritizing Investing

Investing surplus cash before paying extra on debt has advantages too:

Higher Returns – Money that’s invested can earn significantly higher returns than paying off low-rate debt interest.

Tax Benefits – Investment earnings may qualify for deferred or capital gains tax rates.

Long Term Wealth – Consistent investing over decades results in exponential growth through compounding.

Capital Preservation – Invested funds remain accessible for emergencies or other spending needs unlike paying down debt principal.

Future Borrowing Ability – Keeping low rate debts leaves borrowing capacity open for when funds are needed again.

Cons of Investing Before Paying Down Debt

The disadvantages of heavy investing over debt repayment include:

Higher Interest Costs – Keeping higher rate debt costs more in interest than eliminating it early through repayment.

Investment Risk – Returns are not guaranteed and invested money could lose value instead of earning.

Reduced Cash Flow – Keeping monthly debt payments reduces disposable income.

Vulnerability to Downturns – In recessions, investing buys low but job loss makes debt harder to manage.

Lower Credit Score – High debt usage and slow repayment can negatively impact credit ratings.

Splitting Funds Between Debt and Investing

Rather than picking one priority completely over the other, the prudent strategy is often splitting extra money between debt repayment and investing.

This balanced approach provides some of the advantages of each while mitigating the drawbacks of either extreme.

What’s the right split between paying off debt and investing extra cash? Here are three options:

50/50 Method – Put half the extra money towards debt principal payments and half into investments.

Debt Snowball Split – Pay minimums on all debts except the top priority. Put 50% of remaining cash to that top debt, 50% to invest.

Rate Threshold Split – Invest if debt rates are under X% and put extra to debts over X%. For example, invest when debt rates are below 4% and repay debt with rates above.

Plug different splits into a calculator to project how balance and rate thresholds maximize wealth growth.

Examples of When to Repay Debt or Invest

The optimal move depends completely on your personal financial details. But here are examples of common scenarios that generally favor debt repayment or investing when doing the math:

Pay Off Debt First

• High interest credit card or personal loan debt – rates 15%+
• Auto loans or student loans – rates 5-10%
• Mortgage debt in early years when mostly interest payments
• Planning major near term expenditure needing cash flow
• Low risk tolerance or liquidity needs

Invest First

• Mortgage debt with rates below 4%
• Student loans with income based repayment options
• Investment returns optimistically over 10%
• Long time horizon until retirement
• Comfort with risk and volatility

The best way to make the right decision for your situation is to run the scenarios in a loan vs. investment calculator customized to your details.

Choosing the Right Debt vs Investing Calculator

Many free online calculators can provide mathematical guidance on the pay off debt or invest dilemma. Look for calculators that:

• Allow multiple debt listings – Itemize all debts with unique rates and balances.

• Offer flexible investment options – Choose different investment accounts with customized rates of return.

• Make detailed projections – Provide timeframes and totals to see the overall picture.

• Factor taxes – Adjust for tax deductions on interest and investment income.

• Run multiple scenarios – Quickly compare different payment and investing options side-by-side.

Taking a few minutes to crunch the numbers in a tailored pay down debt vs invest calculator can provide clarity when deciding where to allocate any extra cash. Turn to the math, not emotions, for the most financially optimal choice.

The right answer depends entirely on your specific situation – your risk appetite, timelines, interest rates, and tax factors. Let a calculator