Pay off debt or invest has no correct answer, and it needs to be considered depending on the interest rate, type of loan, taxation, and psychology of an individual. The knowledge of what to judge in your specific situation results in better decisions.
The high interest debt (credit cards, payday loans, most personal loans) should nearly always be cleared before investing it beyond employer 401(k) contributions. Once your interest rate is 18-24% you will not find an investment that will pay that much more than debt clearing.
The case with low-interest debt (mortgages, federal student loans, some car loans, etc.) is less obvious. Assuming you have an interest rate of 4 per cent. and you can reasonably expect investments to go off 7-8 per cent., then the arithmetic will be on your side. Nonetheless, the assured payoff of the debt gives an added confidence that is highly appreciated by some, more than the additional returns.
Tax is another aspect of concern. Mortgage interest deductions and student loan interest deductions lowers your effective interest rate. Correspondingly, investment accounts which are tax advantaged boost your net returns. Consider these during decision making.
Even when the equation recommends investing, your individual risk tolerance, as well as your financial security are a legitimate consideration. In the event that debt is stressful or you do not have emergency savings, it may be psychologically ideal to clear debt even when it is not mathematically ideal. Financial choices mean numbers and feelings – they both should be considered.