Investing or Paying off Debt, which leads to a higher Net Worth?

Vanilla and Chocolate live in the fantasy world Banana Bread Land (BBL). They have a daughter Swirl. Swirl has recently graduated university, the University of Banana-Hammock. She has student loans of 50,000 muffins, will pay 5% annual interest, and a period of 20 years. This gives her a payment of 330.25 muffins a month. Her parents are willing to give her 500 muffins a month to help cover her loans. Swirl wants to know, is it better to pay off the loans faster and invest at a guaranteed 7% every year, or start investing the money her parents give her right away? Let’s take a look.

This is Swirl’s starting position at the beginning of 2021.

2021No extra payments
 Student Loans: 50,000 muffins
Swirl has 0 assets, and her liabilities (money she owes to others) is 50,000 muffins in 2021

Swirl is fortunate to get a good paying job after university. She tells her parents the extra payment is not needed. If she only made minimum payments on her student loan, this is her position after 5 years. She says, I am young, let me enjoy my life. I can save later.

2026 No extra payments
 Student Loans: 41,864. 53 muffins
Swirl still has 0 assets, and her liabilities (money she owes to others) is 41,864.53 muffins in 2026

Finally, after 20 years, she makes her last payment. At last! Freedom is at hand.

2041 No extra payments
 Student Loans: 0 muffins
Swirl still has 0 assets, and her liabilities (money she owes to others) is 0 muffins in 2041

You will easily notice that Swirl has never accumulated any assets over 20 years. She didn’t follow her parents footsteps, who prudently saved for retirement. Luckily, Swirl has one of those fancy time travel machines (no Time Variance Authority here), and travels back 20 years. She goes back to her parents, humbly says, I’ll take the extra 500 muffins a month, and I’m going to pay down my loans faster.

2026500 muffins extra a month for debt
 Student Loans: 8,500.51 muffins
Swirl still has 0 assets, and her liabilities (money she owes to others) are much lower, at 8,500.51 muffins in 2026

Swirl pays down her loans in month 70. She invests 830.25 muffins a month at a guaranteed 7% interest rate for the remaining 170 months. This is how her situation changes after 20 years.

2041 500 muffins extra a month for debt
Investments: 241,395.05 muffins 
Swirl now has 241,395.05 muffins in her investments, and 0 student loans in 2041.

Not bad! Swirl wonders, I wonder what the situation would be like if I used my time machine, and invested the money, all from the start! Capital idea, Swirl. Swirl invests the 500 muffins her parents give her from the first month. After 5 years, she takes a peek.

2026 500 muffins extra a month for investments
Investments: 35,796.45 muffins Student Loans: 41,864.53
Swirl has negative net worth (asset – liabilities), and her net worth is -6,068.08 muffins. This is better than paying down the debt with the extra funds.

Oh! This is slightly better, says Swirl. I have assets, and how much I am worth, while negative, is better than before. Let’s continue for 20 years.

2041 500 muffins extra a month for investments
Investments: 260,463.30 muffins Student Loans: 216.22 muffins
Swirl has higher positive net worth, even after subtracting the 216.22 muffins she owes on her final loan payment. Her assets minus liabilities are more than if she paid off her debt in full, and invested the rest when she was done.

This is the best of all worlds, claims Swirl. I have the most assets and very little in student loan debt. She lives happily ever after. The End.

In reality, things are not so simple. It’s hard to earn a high, consistent, guaranteed rate of return for 20 years without taking more risk of loss. Returns are variable, and can go negative. How much debt should you pay off in full before you invest? Paying off debt generates a guaranteed return. In my experience, you should start investing right away, even if it is 1 unit of currency per week. Fintech companies like Robinhood, Acorns and Sofi make it simple to invest in passive, sustainable investments or actively invest with small amounts. This blog has emphasized paying off debt consistently. There does come a time when you need to start investing while paying off debt. That point for us was when debt was no longer choking our ability to live.

Swirl didn’t have any unexpected expenses in her fairy tale life. That’s not true for most of us. The pandemic has shown us the value of emergency savings and built up, liquid assets. Be prudent, pay off your debt as much as you can, start investing as soon as you can, and while that happens, live in the present and enjoy your life. Slowly increase your savings and investments as you progress in your career and have more side gigs to earn income. Your net worth will go from negative to neutral to positive over time. Investing is a long game. Do it right, and it will reward you handsomely.

Thanks for reading! If you would like to get more of these blog posts, hit the subscribe button with your email.

Warmest regards,


Published by smilingdad

My story is one of tragedy and redemption. We've made many mistakes along the way regarding our money. Our goal here is to show you how to take care of your money life long, and as much as we can, help the Earth along the way. I call it sustainable personal finance and ethical capitalism. Currently, I am a part time writer for Cleantechnica and part-time licensed financial professional, along with being a full-time dad.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: