In this paper, Peak Capital explores the optimality of investing versus paying off debt. We hope to provide assistance in the decision making process through our analysis; however, there is ultimately no 100% correct answer. The answer will be dependent upon each person's unique situation and aversion to risk. The answer to "Pay or Save" should not be limited to a binary outcome.
The optimal choice to invest or pay off debt cannot be determined by comparing expected returns and financing costs in isolation. A holistic approach should be incorporated in the decision which includes consideration of volatility of investments, risk tolerance, need for future cash flows, and tax implications.
Be cautious when using "Invest vs Pay Off Debt" calculators. It is critical that the outputs are questioned and given their due diligence. One of the primary limitations of these calculators is the assumption of static rates of return without consideration of investment volatility.
At the most fundamental level, the decision to pay off debt or invest comes down to one simple question: Is it worth the risk?