Thu Mar 20 2025, by Tyler Gardner

A 4-Step Plan for Deciding Which Debt to Pay Down

Here is my four-step plan for figuring out which debt I pay down and which debt I don't, because not all debt is created equal. I'm Tyler, a former financial advisor and portfolio manager, and I create financial content for free to help you make smart financial decisions.

1. Determine the Risk-Free Rate

Start by looking up the risk-free rate. This is usually the return you can get by investing in the US 10-year government bond. This morning, that was at 4.5%.

2. Pay Down High-Interest Debt

If my debt is costing me more than 4.5%, it’s a no-brainer. I pay down that debt as quickly as possible because I’m getting the equivalent of an even higher risk-free return.

3. Let Low-Interest Debt Ride

If my debt is costing me less than 4.5%, I let it ride, knowing I can get a higher risk-free return somewhere else.

4. Bonus Tip for Younger Investors

If I’m in my 20s or 30s, I’d be even more aggressive with debt. Instead of basing my decision on the risk-free rate, I would use the long-term historical average return of the US stock market, which is closer to 7%. If my debt were under 7%, I'd invest the money in the S&P 500. Odds are, over the long haul, I’d come out on top.

If any of this is helpful, sign up for my free newsletter in my bio, and every Sunday morning, I’ll continue to share insights to help get you one step closer to your financial goals.

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