Investing or paying off debt can be a tough financial decision to understand, especially if you want to start investing and you feel like you’re falling behind. While investing helps grow your wealth, carrying high-interest debt can significantly erode your financial progress. So, which one should you prioritize? The answer largely depends on your debt type, interest rate, and financial goals.
Pay Off High-Interest Debt First
If you have high-interest debt, such as:
- Credit cards (typically 19%+ interest)
- Personal loans with high interest rates
- Payday loans (which can exceed 300% interest)
High-interest debt can also hurt your broader financial profile if missed payments or high balances start weighing on your credit. If that is already happening, read our guide on how to increase your credit score in Canada alongside this payoff plan.
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If overspending or missed payments are part of the problem, separating spending money from your main account can help. KOHO may be worth comparing as a prepaid spending account with budgeting and optional credit-building features. You can check the current KOHO offer here, and you can also read our review of whether KOHO is safe and legit.
You should prioritize paying off debt before investing. Why? Because no investment guarantees returns higher than the interest rates on credit cards or payday loans. Unless your investment can return higher than your interest rate you should pay off your debt before investing.
For example, if your credit card charges 20% interest and the stock market historically returns around 7-10%, paying off your debt is a guaranteed 20% return on your money—far better than uncertain investment gains.
When You Can Consider Investing
Once you’ve tackled high-interest debt, you can consider investing while paying off lower-interest debt. Here are some scenarios where investing might make sense:
- Mortgage debt (3-6% interest): If your mortgage rate is low, investing in diversified assets like ETFs may yield higher long-term returns.
- Student loans (4-7% interest): Some student loans have manageable rates, and investing in a TFSA or RRSP could provide tax advantages.
- Government-backed debt: If you have a structured repayment plan (e.g., Canada Student Loans with flexible repayment terms), investing alongside repayment might be feasible.
Striking a Balance: A Hybrid Approach
For those with moderate-interest debt, a hybrid approach can work:
- Pay the minimum on all debt. Avoid penalties and late fees.
- Contribute to employer-matched RRSPs or pensions. This is “free money” you don’t want to leave on the table.
- Aggressively pay off remaining debt while investing modestly. If your debt interest is below 5-6%, consider directing some funds into a TFSA or RRSP while still prioritizing debt repayment.
Final Verdict: Paying Off Debt is the Best Investment
For most Canadians, paying off high-interest debt is the smartest financial move before investing. While investing is crucial for building wealth, eliminating debt guarantees a risk-free return, improves cash flow, and enhances financial security.
If you’re debt-free or managing low-interest debt, investing becomes a powerful wealth-building tool. However, if you’re drowning in credit card debt, start by paying that off first—then look at investing.
