Debt Paydown vs Investment

Overview

The Debt Paydown vs Investment calculator helps you compare two ways of using available cash:

1. Pay down debt by making a lump-sum payment.
2. Invest the cash while continuing to make the original debt payments.

The calculator projects the financial outcome over one or more comparison periods and shows which strategy produces the higher net wealth under the assumptions you provide.

This is a comparison tool, not personalized financial advice.

Inputs

Available Cash

The amount of cash available for either debt repayment or investment.

Example: 20000 USD

If the available cash is greater than the outstanding debt, only the amount needed to eliminate the debt is applied to the debt in the paydown scenario.

Debt Remaining

The current outstanding balance of the debt.

Example: 100000 USD

Debt Interest Rate

The annual interest rate charged on the debt.

Example: 9 pct/yr

A higher debt rate increases the financial benefit of paying down the debt.

Remaining Debt Term

The remaining term of the debt, in years.

Example: 20

The calculator uses this term to determine the original monthly debt payment and the reduced monthly payment after the lump-sum paydown.

Expected Investment Return

The expected annual investment return before tax.

Example: 8 pct/yr

The calculator applies the investment tax rate to this return.

Investment Tax

The tax rate applied to investment returns.

Example: 15 pct

The calculator uses the after-tax investment return for the investment scenario.

Inflation Rate

The expected annual inflation rate.

Example: 3 pct/yr

Inflation is used to show equivalent values in today's purchasing power.

Comparison Periods

The number of years over which you want to compare the strategies.

Enter one or more whole numbers separated by commas.

Example:

5,10,20

This produces results after 5, 10, and 20 years.

How the comparison works

Strategy 1 --- Invest

The available cash is invested immediately.

The original debt remains in place, so the original monthly debt payment continues.

At each comparison date, the calculator determines:

• investment value;
• remaining debt balance;
• net wealth = investment value minus remaining debt.

Strategy 2 --- Pay Down Debt

The available cash is applied immediately to the outstanding debt.

Because the debt balance is lower, the required monthly payment is recalculated over the remaining debt term.

The difference between the original and reduced monthly payment is assumed to be invested at the after-tax investment return.

This makes the comparison fairer: the paydown strategy does not simply ignore the cash-flow benefit created by the lower debt payment.

At each comparison date, the calculator determines:

• remaining debt balance;
• value of the invested monthly payment savings;
• net wealth = investment of payment savings minus remaining debt.

Understanding the results

Original Monthly Debt Payment

The monthly payment calculated from the original debt balance, interest rate, and remaining term.

Reduced Monthly Debt Payment

The monthly payment after applying the available cash to the debt.

If the available cash is enough to eliminate the debt, this value becomes zero.

Monthly Payment Saving

The difference between the original and reduced monthly payments.

This amount is assumed to be invested every month in the debt-paydown scenario.

After-Tax Investment Return

The expected investment return after applying the specified investment tax.

For example, with an 8% expected return and 15% tax:

• Before tax: 8%
• Tax: 15% of the return
• After tax: 6.8%

Break-Even Investment Return

The approximate pre-tax investment return required for the investment return, after tax, to equal the debt interest rate.

For example, with a 9% debt rate and 15% investment tax, the break-even investment return is approximately 10.59%.

An expected investment return above this level may favor investing, while a return below it generally favors paying down the debt, subject to the other assumptions and risks.

Comparison table

The calculator provides results for every requested comparison period.

Important columns include:

Result	Meaning
Investment Value	Value of the initial cash when invested.
Debt Balance (Invest)	Remaining debt when the cash is invested.
Net Wealth (Invest)	Investment value minus remaining debt.
Savings Invested (Paydown)	Future value of the monthly payment savings.
Debt Balance (Paydown)	Remaining debt after the lump-sum paydown.
Net Wealth (Paydown)	Investment of payment savings minus remaining debt.
Wealth Difference	Net wealth from investing minus net wealth from paying down debt.
Net Wealth (Invest, Today)	Investment strategy net wealth adjusted for inflation.
Net Wealth (Paydown, Today)	Paydown strategy net wealth adjusted for inflation.
Difference (Today)	Inflation-adjusted wealth difference.
Better Choice	Strategy producing the higher calculated net wealth.

A positive Wealth Difference means the investment strategy produces higher calculated net wealth.

A negative Wealth Difference means the debt-paydown strategy produces higher calculated net wealth.

Example

Suppose you have:

• Available cash: $20,000
• Debt remaining: $100,000
• Debt interest rate: 9%
• Remaining debt term: 20 years
• Expected investment return: 8%
• Investment tax: 15%
• Inflation: 3%
• Comparison periods: 5, 10, 20 years

Enter:

Available Cash       20000 USD
Debt Remaining       100000 USD
Debt Interest Rate   9 pct/yr
Remaining Debt Term  20
Investment Return    8 pct/yr
Investment Tax       15 pct
Inflation            3 pct/yr
Comparison Periods   5,10,20

The calculator will then show the relative net wealth of the two strategies after 5, 10, and 20 years.

Important assumptions

The comparison depends strongly on the assumptions entered.

In particular:

• Investment returns are assumed to compound at the specified expected rate.
• Investment returns are reduced by the specified investment tax.
• The debt is modeled using a fixed interest rate and fixed remaining term.
• The lump-sum debt payment is made immediately.
• The reduced debt payment is recalculated over the remaining debt term.
• The monthly payment saving from the debt-paydown strategy is invested at the after-tax investment return.
• Inflation is used only to express projected wealth in today's purchasing power.
• The calculator does not account for investment volatility, transaction costs, investment fees, changing tax rates, variable debt rates, or other personal financial circumstances.

Interpreting the result

Do not look only at the nominal future value.

A strategy can show a larger future dollar amount but a smaller inflation-adjusted value. The Difference (Today) is therefore useful when considering long-term periods.

Also consider factors that cannot be captured completely by a numerical comparison:

• investment risk;
• certainty of the debt interest savings;
• liquidity needs;
• emergency cash reserves;
• tax deductions or credits;
• penalties or fees for early debt repayment;
• variability of future investment returns.

The calculator provides a mathematical comparison based on the assumptions supplied. It does not determine which choice is appropriate for an individual's financial situation.