Tackle Debt

Not all debt is created equal. A 3% mortgage on an appreciating house is fundamentally different from a 24% credit card balance. Before you invest aggressively, you need to deal with the expensive stuff.

The simple rule: if the interest rate on your debt is higher than what you’d reasonably expect to earn by investing (~7-8% average annual stock market return), pay it off first. That’s a guaranteed return.

Good Debt vs Expensive Debt

Type	Typical rate	Tax deductible?	Example
Low-cost / “good” debt	2-6%	Often yes	Mortgage, federal student loans
Medium-cost debt	6-10%	Sometimes	Private student loans, some auto loans
Expensive / “bad” debt	10-30%+	No	Credit cards, payday loans, personal loans

Expensive debt is a financial emergency. A credit card at 24% APR means every $1,000 you carry costs you $240/year in interest. No investment reliably returns 24%. Paying off that card is the best investment you can make.

The Order: Emergency Fund First

Before you throw every spare dollar at debt:

Build Tier 1 of your emergency fund first — at least 1 month of expenses in checking.
Keep making minimum payments on everything — never miss a minimum payment.
Then attack the debt — with any money above minimums, use one of the strategies below.

Two Strategies: Avalanche vs Snowball

There are two well-known approaches to paying off multiple debts. Both work. The “best” one is whichever you’ll actually stick with.

Avalanche Method (Lowest Total Cost)

Pay minimums on everything, then put all extra money toward the debt with the highest interest rate. When that’s paid off, roll the payment to the next highest rate.

Best for: People who are motivated by math and logic.

Snowball Method (Fastest Wins)

Pay minimums on everything, then put all extra money toward the debt with the smallest balance. When that’s paid off, roll the payment to the next smallest balance.

Best for: People who need visible progress to stay motivated.

Try It: Compare Your Debts

Debt Payoff Comparison

Name Balance Rate Minimum

Extra monthly payment

Avalanche

Highest rate first — saves the most money

29 months

$1,785 in interest

Snowball

Smallest balance first — faster psychological wins

31 months

$2,215 in interest

Avalanche saves $430 more in interest.

But the snowball gives faster wins — pick what fits your psychology.

When to Pay Debt vs Invest

Debt interest rate	What to do
Above 8%	Pay it off before investing (beyond employer match)
5-8%	Judgment call — consider splitting extra money 50/50
Below 5%	Generally fine to invest while making payments, especially if tax-deductible

Always capture your employer 401k match first, regardless of debt. An employer match is a guaranteed 50-100% instant return — no debt costs that much.

Your Debt-to-Income Ratio

Lenders use your debt-to-income (DTI) ratio to determine how much you can borrow:

DTI = Total monthly debt payments ÷ Gross monthly income

DTI	What it means
Under 20%	Comfortable — plenty of room
20-36%	Manageable, but watch it
36-43%	Stretching — hard to qualify for best mortgage rates
Above 43%	Risky — most conventional lenders won’t approve a mortgage