Debt versus investing: What’s the best path for you?

If you’ve ever wondered whether you should be focused on paying off debt versus investing your hard-earned cash, you’re not alone. MAS Head of Growth (Investments), Jacob Hattersley, breaks down the benefits of both options.

It’s one of the most common financial questions out there: Should I pay off all my debt or start investing? And the truth is, the right answer isn’t always either/or. Sometimes, it’s both. 

Before figuring out the right path to take, it’s worth understanding that not all debt should be considered in the same category. You may have heard financial advisers talk about good debt versus bad debt.  

A simple way to understand this is that some debt can actually work for you. When you borrow money at a reasonable rate to buy an asset, like a home or a business, that is likely to increase in value over time, or you take a student loan that might lead to greater earning potential in the future, that can be considered good debt. It’s debt that may lead to an improvement in your financial position in the long term. It’s worth noting, of course, that even good debt can become a problem if you borrow too much or can’t manage the repayments. 

Bad debt, on the other hand, is borrowing money at a high rate to purchase something that is going to lose value, e.g. most consumer goods. An example of this is using your credit card, a hire purchase plan or a high interest personal loan to pay for items or experiences you can’t currently afford. In this case, the debt is bad because those high interest rates mean you’ll likely end up paying far more than the original purchase price for something that will quickly lose value.  

Beware of bad debt 

When it comes to investing versus paying off bad debt, the general rule of thumb is to pay off the bad debt first. The good news is that when you clear bad debt, you free up cashflow. That cashflow could then become money you invest going forward. No one wants to be worrying about credit card bills or a lingering personal loan later in life, so it’s a good idea to eliminate the costly stuff first, then start investing to set your future self up to win. 

Consider KiwiSaver 

Here’s something every KiwiSaver member should know: even if you’re focused on paying off debt, good or bad, it’s still smart to keep contributing to your KiwiSaver account. Why? Because your employer is legally required to contribute 3.5% (as of April 2026), but only if you’re contributing at that rate too. This compulsory employer contribution rate is set to rise to 4% as of April 2028. 

That’s an instant, risk-free return. On top of that, the Government chips in with its annual Government Contribution of $260.72, providing you meet the contribution and eligibility thresholds. That’s money you don’t want to leave on the table. Free returns are rare, so it’s great to grab them. 

And while you’re contributing, remember the powerful forces at play: long-term compounding and dollar-cost averaging. Small, regular contributions – through good markets and bad – add up over decades. Time in the market beats timing the market every time. 

Mortgage matters 

When weighing up investing versus paying down your mortgage, a split approach can be worth considering. Extra repayments provide a certain benefit by reducing the interest you would otherwise pay. That’s effectively a known return. Current fixed mortgage rates are relatively low by historical standards. This raises the question of whether some capital could earn a higher return if invested. Returns from investing are uncertain and can vary over time, so this comparison is not straightforward. 

If your cash flow allows, it can make sense to do some of both. Paying down the mortgage reduces your interest costs, while investing provides exposure to potential long-term growth, with the trade-off of short-term variation. Over long periods, share markets have often produced positive returns, although outcomes vary year to year, and past performance does not guarantee future results. For New Zealand investors, currency movements also influence outcomes. 

A balanced approach, with steady mortgage reduction alongside regular investing, can help manage these trade-offs. The right mix depends on your risk tolerance, time horizon and need for certainty versus growth. 

Student loan stats 

Now, let’s talk student loans. If you’re a PAYE earner on the right tax code, 12% of your pay automatically goes towards any student loan you may have. For most people living in New Zealand, that loan is interest free, meaning the amount isn’t growing over time and inflation is actually eroding the real value of what you owe. Therefore, if you do have money to spare once those payments have been deducted, then making regular contributions into an investment fund is a great option that your future self will thank you for. For Kiwis living overseas, interest does apply, so it might be a different matter. 

Pick your path 

As you can see, there are cases where paying off debt and investing simultaneously can make good sense. However, it’s also completely understandable that some people simply prefer the peace of mind that comes with being debt-free. Reducing stress can sometimes be more important than potential earnings from investments.  

Age and stage can also play a part. Younger borrowers have time for compound investment growth to work its magic, making investing attractive despite debt. Those nearing retirement might prefer to prioritise debt elimination as they enter their non-working years. The sweet spot for most is a balanced approach that evolves as you age. 

Talking to a financial adviser is a good way to figure out what’s right for you and, as a MAS Member, you have access to an Adviser at no extra cost.