Should I Pay Off Debt or Invest? — Australian Framework

One of the most common financial questions Australians face: should I put extra money toward paying off debt, or invest it? The mathematical answer is straightforward; the practical answer requires a few additional considerations.

The Core Framework: Compare Rates

The starting point is comparing the guaranteed return from paying off debt (the interest rate you avoid) with the expected return from investing.

Expected long-term returns from a diversified ASX/global share portfolio: historically 7–10% p.a. before inflation (this is a historical average, not a guarantee — actual returns vary significantly year to year).

When to Pay Off Debt First

Pay off debt first when:

1. The interest rate is high (>7–8%) — the guaranteed return from avoiding 20% credit card interest outperforms almost any investment
2. The debt is affecting your mental health — financial stress is real; the psychological benefit of being debt-free has value even if the maths slightly favours investing
3. The debt is unsecured — credit card and personal loan debt carries more risk than secured debt (mortgage)

When to Invest First (or in Parallel)

Investing may make sense when:

1. The debt rate is low (<5%) — HECS-HELP indexed at CPI is often better to leave and invest the difference
2. You have an employer match or super incentive — salary sacrifice into super reduces taxable income while building wealth; often a better return than paying down low-rate debt
3. The mortgage rate is moderate (5–6%) — a long-term share portfolio may outperform this after the 50% CGT discount on gains; though not guaranteed
4. You have a long investment horizon — compounding matters more the earlier you start

The “Both” Approach

Many Australians do both simultaneously:

• Pay the minimum on all low-rate debt
• Invest a set amount each month (e.g., into ETFs or super)
• Put any extra money (bonus, tax refund) toward high-interest debt

This balances debt reduction with building long-term wealth, while avoiding the risk of investing with high-rate debt still outstanding.

HECS-HELP — A Special Case

HECS-HELP debt is indexed to CPI, not a standard interest rate. It does not appear on your credit report. Compulsory repayments happen via PAYG when income exceeds the threshold.

In most cases, voluntarily paying down HECS early is not the highest financial priority — paying off high-rate commercial debt and investing for long-term growth typically offer better returns. However:

• In high-inflation years, CPI indexation can be significant (FY2023: 7.1%)
• HECS balances reduce your borrowing capacity for mortgages (lenders include HECS in liability calculations)

A Practical Decision Framework

$$\text{If debt rate} > \text{Expected investment return} \Rightarrow \text{Pay off debt}$$

$$\text{If debt rate} < \text{Expected investment return} \Rightarrow \text{Consider investing}$$

$$\text{If debt rate} \approx \text{Expected investment return} \Rightarrow \text{Do both / follow your risk preference}$$

Always: maintain an emergency fund regardless of whether you are prioritising debt or investing.

FAQ

Should I pay off my mortgage or invest? At current Australian mortgage rates (5–6.5%), this is genuinely close. Many financial planners suggest doing both — making additional mortgage repayments reduces interest and builds equity, while also investing in a diversified portfolio benefits from long-term compounding. The decision depends on your risk tolerance and tax situation.

Is it better to invest or pay off HECS? For most Australians, investing (especially via super salary sacrifice) offers a better expected outcome than voluntarily paying off HECS early, given the CPI-only indexation. HECS will be repaid gradually via compulsory repayments as income grows.

What about the mental health factor? Debt creates stress for many people. If paying off debt faster provides significant psychological relief, that is a valid reason to prioritise debt repayment even when the maths might slightly favour investing. Financial decisions are not purely mathematical.

See also: How to Get Out of Debt | FIRE Australia | Investing in Australia

For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.