Should you clear high interest debt before investing?
The house view is yes. For most people it makes sense to clear high-interest debt, such as credit cards or store cards charging above roughly 10%, before investing. The interest on that debt usually grows faster than any realistic return from investing, so clearing it is one of the most reliable wins available.
The guaranteed return logic
Paying off a debt charging 20% interest is effectively a guaranteed 20% return, with no market risk. Few investments can match that with any certainty, and none can match it reliably.
That is why expensive debt sits so high in the order. Investing while carrying it is like trying to fill a bucket with a hole in the bottom.
What counts as high interest debt?
The clearest examples are credit cards, store cards, overdrafts, and payday loans. As a rough line, anything above around 10% deserves priority attention.
Lower-rate borrowing is different. A student loan or a low-rate mortgage follows different maths and comes later in the plan, in Step 5.
How to approach it
Two common methods work well:
- Avalanche: target the highest interest rate first. This saves the most money overall.
- Snowball: clear the smallest balance first. This builds momentum and motivation.
The maths favours the avalanche, but the best method is the one you will stick to. Keep your emergency fund from Step 1 intact while you do it, so a surprise cost does not push you back onto the cards.
With costly debt cleared, the next step is capturing free employer contributions in Step 3.
