In 2024, interest rates are still on the low side, historically speaking.  For this generation, they are on the high side.  Interest rates stayed close to zero for quite a while, so they may seem high now.

With the yield curve still inverted, a one-month Treasury bill is paying a yield of about 5.5%.  A 10-year Treasury is yielding about 4.5%.  Mortgage rates are now generally above 7% for a 30-year fixed.

What if you have debt?  With interest rates higher as compared to a couple of years ago, does it make sense to pay off debt?  Does it make more sense to invest the money?

There is not a clear answer on this entire question, but it helps to consider some variables.  The most important thing is what type of debt it is and what the interest rate is on that debt.

If you have credit card debt at 10% or 20%, it would almost always make sense to pay it down or pay it off if you have the money to do so.  There are always exceptions where you might need the money in the near future.  In this scenario, we are assuming you have a generally steady income and there are no extraordinary expenses coming up that you know about or extraordinary opportunities.

It is always good to have some kind of emergency fund, so you almost never want to drain your bank balance down to nothing.  When it comes to credit card debt, it can even make sense to dig into your emergency fund to pay it off.  If you unexpectedly lose your job and need to buy food, you can always use the credit card and go back in debt.

Even with other debt that has a high interest rate (say, 8% or above), it will usually make sense to pay it down, especially as compared to investing.  You can’t get a solid 8% return anywhere in this market unless you have a reliable business.  You might be able to get 8% or more, but those types of investments usually carry the risk that you will lose money.

So, even for student loan debt or car debt, extra money should go towards these things if the interest rate is higher than the yield on the 1-month Treasury (about 5.5%).

A mortgage is a bit trickier, but even here it would make sense to pay down a high-interest mortgage.  But you don’t want to take anything from an emergency fund because you are tying up the money you use to pay down a mortgage, especially if you are not close to paying it off.

Where to Invest?

It is almost never a good idea to invest in stocks or something else that has a decent chance to go down in value when you are carrying significant debt.  If you truly have a near-zero interest rate on some kind of debt, then maybe it makes sense to not pay it early.  But this is not the case with most debt, especially now.

Let’s say you have a car loan with a 4% interest rate.  You can currently earn a yield of approximately 5.5% in a 1-month Treasury bill.  These are about the closest things to a safe investment that exists.  There is the inflation factor, but that doesn’t matter in this example because we are talking about paying a debt with a fixed interest rate versus investing in a Treasury bill.  Inflation will only matter in this example if it impacts the interest rate on the Treasury bills.

In this scenario, it makes sense financially to pay the minimum on the car loan and invest the extra money in 1-month Treasury bills while continuing to roll them over.  Don’t forget you have to pay taxes on the 5.5% “profit”.  So, your return might only be 4.5%, which isn’t much of a difference.  In this case, I would probably just pay off the car loan because that little extra isn’t worth the trouble.

If the yield goes down below 5%, and your after-tax return goes down to about 4%, then it is no longer worth it to invest.  It may not have been worth the hassle at a 4.5% after-tax return.

It is possible the yield could go higher.  Then you could keep rolling over your Treasury investments while paying the minimum payment on your car loan.

Notice I never mentioned investing in stocks or real estate or Bitcoin or gold.  The reason I’m focusing on Treasury bills is because it is a guaranteed return.  You could invest in any of those other things and lose money, let alone not make enough to cover the interest rate on your debt.

Conclusion

There are a lot of nuances in this discussion.  It depends on the debt and the interest rates.  It depends on whether the debt is at a fixed interest rate or is variable.  It depends on your own financial situation and what you see coming in the future.

In general, it still makes sense to pay off most non-mortgage debt as quickly as possible unless you can get a higher return with a U.S. government Treasury bill or some kind of safe investment like a cd with your bank.  Even here, sometimes it just isn’t worth the trouble to go through it, especially after factoring in taxes.