The decision to pay down debt or invest is a personal one. It depends on a lot of factors such as risk tolerance, your number of income streams, liquidity needs, family expenses, job security, investing acumen, retirement age, inflation forecasts, and bullishness about your future in general.
I’ve had hundreds of people ask me whether to pay down debt or invest over the years. As a result, I came up with the Financial Samurai Debt And Investment Ratio, or FS DAIR for short back in 2014. Despite interest rates plunging since then, the FS DAIR framework still holds up strong.
The FS DAIR formula for deciding whether to pay down debt or invest is as follows:
Debt interest rate X 10 = percent of cash flow after living expenses allocated towards debt pay down
In other words, if you have a mortgage with an interest rate of 3%, utilize 30% of your monthly cash flow after living expenses each paycheck to pay down debt. Invest the remaining 70% of your cash flow based on your investment preferences.
If you concurrently pay down debt and invest, it’s very hard to lose in the long run. Ultimately, it’s best to be debt-free when you retiree or no longer have the desire to work.
As the CFO of our own finances, it’s up to us to figure out the most efficient use of capital. With FS DAIR, you will approach paying down debt or investing in a rational manner.