Annual Financial Checkup Workbook/Course
Section 3: Building Your Wealth

Question #3 - Do you have any low-interest debts?

Complete & Continue Next Lesson Learn More

Should You Pay Off Low-Interest Debt Early?

Not all debt is created equal, and low-interest debts can live in a gray area.

Low-Interest Debt

These debts come with interest rates below the expected market returns, generally below 5–6%.

Examples potentially include federal student loans, mortgages, auto loans, and personal loans with low rates.

Why it matters: Low-interest debt may not need to be paid off aggressively if your money could grow faster elsewhere. However, it should still be factored into your overall financial independence plan.

They say that having the ability to pay off your home is just as good as owning a paid-off home, so it’s generally recommended to hold onto these debts and pay them off slowly while investing extra cash. This allows your money to grow and build wealth more effectively over time.

However, peace of mind matters, and this is when your S.W.A.N. (Sleep Well At Night) number becomes important. If debt keeps you awake at night, paying it off could be the right move, even if the math says otherwise.

Check out Section 2 for information about finding your S.W.A.N. number.

Sometimes, the smartest financial move is the one that helps you breathe easier.

Pros of Paying off All Debts

  • Peace of Mind: Eliminating debt—no matter the rate—can reduce stress and simplify your finances.

  • Guaranteed Return: Paying off a 3% loan is equivalent to earning a risk-free 3% return, which can be appealing in uncertain markets.

  • Improved Cash Flow: Fewer monthly obligations free up money for other goals or emergencies.

  • Lower Debt-to-Income Ratio: This can improve your credit profile and borrowing power for future needs.

  • Motivational Momentum: Crossing off a debt can feel like a win and fuel progress toward bigger goals.

Cons to Paying off Low-Interest Debts

  • Opportunity Cost: If your investments could earn 6–8% or more, paying off a 3% loan might slow your wealth-building.

  • Liquidity Trade-Off: Using cash to pay off debt may leave you with less flexibility for opportunities.

  • Potential Prepayment Penalties: Some loans charge fees for early payoff—always check the fine print.

  • Credit Score Impact: In rare cases, closing a long-standing account could slightly affect your credit score.

Use the worksheets below to map out your Low-Interest Debts, along with a flow chart to help guide you in deciding whether to pay off low-interest debts or focus on investing.

Downloadable Worksheets

LOW-INTEREST DEBTS Worksheet

This worksheet is also included in the Annual Financial Checkup Section 3 bundle.

LOW-INTEREST DEBT PAYOFF FLOW CHART

This chart is also included in the Annual Financial Checkup Section 3 bundle.

Section 3 Annual Financial Checkup bundle.

This bundle includes all the worksheets for Section 3, including the DISTANT FUTURE EXPENSES worksheet, in a single, easy-to-use PDF download.