Suppose you’ve just come into an extra $5,000. Maybe it was a job bonus, your pay for a moonlighting project, a gift from a generous family member, or the proceeds from selling something you own. You could spend the money, of course, or you could put it to a more productive purpose, such as investing it or paying down debt. Here’s how to decide which of those two options makes the most sense for you.
Key Takeaways
- The right choice depends on your interest rates, debt type, and financial situation.
- Paying off high-interest debt (like credit cards) often yields the biggest return.
- Investing may make more sense if your debt is low-interest and you have an emergency fund.
- Emotional peace of mind matters just as much as financial math.
- A split strategy—paying off some debt and investing the rest—can be a great option.
Start With the Numbers
One way to look at investing vs. debt reduction is in terms of your potential return. If you invest the money in something relatively safe—such as a certificate of deposit (CD) at a federally insured bank—you might earn about 4.5% a year on it at recent rates. A $5,000 CD with an annual percentage yield of 4.5% would earn you $225 in a year’s time. Meanwhile, if you also have a $5,000 debt you’re currently paying 10% annual interest on, you’ll fork over $500 in interest payments over the course of the year. That’s a difference of $275. Economists call this your opportunity cost.
You might be able to invest in something that earns you more than your debt costs you, although there are no guarantees. The S&P 500 stock market index, for example, returned 28.47% in 2021, but it lost 18.04% in 2022. Over the past 100 years, the S&P 500 has returned an annual average of about 10%, with many ups and downs along the way.
Tip
You could owe income tax on your $5,000—depending on where it came from. So you might want to put some of the money aside in savings to cover that obligation when you file your next tax return.
Debt Type Matters
The simplified example above used 10% as a hypothetical interest rate on a debt. Of course, actual interest rates can vary widely. For example, according to Investopedia’s research, the average interest rate on a credit card was 23.99% in August 2025. The average rate on a 60-month car loan at around the same time was 7.67% (May 2025), while the average rate on a 30-year fixed mortgage was around 6.72% (July 2025).
Generally speaking, the higher the interest rate you’re paying on a particular debt, the greater the benefit of using your $5,000 windfall to pay that debt off.
When Investing Wins
While paying off debt almost always has an edge over investing—in part because investing is speculative and debt is more of a sure thing—there are times when you might want to invest some or all of the money anyhow.
One would be if you don’t already have an emergency fund. It might be better to carry a little debt—even on a credit card—than to have no cash available to cover an unexpected car repair or medical bill.
Another reason to invest is if you can be reasonably certain you’ll make more money that way than you would lose by not paying off your debt faster. For example, if you were lucky enough to lock in a 3.5% mortgage rate a few years ago when that was possible, you won’t gain anything from a financial perspective by paying it down faster when you could earn a safe 4% in a high-yield savings account.
If you do decide to invest the money, consider your time horizon, which will vary according to whatever future goals you have in mind for it. If you hope to use the money toward the down payment on a home in a couple of years, for instance, you’ll probably want to invest it more conservatively than if you’re tucking it away for your retirement decades from now.
Where To Invest $5,000
Many types of investments have minimum initial investment requirements, but $5,000 is usually more than enough to meet them. You could add the $5,000 to an existing account of yours, but if you’re looking to invest in something new, here are a few of your major options, listed roughly in order of most conservative to most aggressive:
Treasury bills. Treasury securities (bills, bonds, and notes) have historically been considered the safest of all investments because they’re backed by the “full faith and credit” of the United States government. Treasury bills, for example, are available in seven different terms, ranging from four to 52 weeks, and are sold in increments of $100. You can buy them directly from the government at TreasuryDirect.gov or through many banks and brokers.
CDs or high-yield savings accounts. For safety’s sake, you’ll want to look for a bank that’s covered by the Federal Deposit Insurance Corporation (FDIC) or a credit union with coverage from the National Credit Union Association (NCUA). Most are, but it’s worth checking.
Mutual funds or ETFs. Mutual funds and exchange-traded funds (ETFs) hold a portfolio of securities and can vary widely in risk (and potential reward) depending on what those securities are. A mutual fund or ETF might, for example, focus on ultra-safe Treasury securities, somewhat more volatile blue chip stocks, or very aggressive small company stocks. Other mutual funds hold a mix of conservative and more speculative investments.
Individual stocks. Shares in individual companies will also vary in risk, from blue chips at one end of the continuum to the hottest new startups on the other.
You can purchase stocks and many other investments through a full-service brokerage firm or a discount broker. Some brokers have minimum investment requirements, but others have no or very low minimums.
Other Ways To Pay Down Your Debts
If your goal is to pay your debts off faster—or to at least lower the interest rate you’re paying on them—there are also other ways to go about it besides using your cash.
For example, if you qualify, you might be able to move your existing credit card debts to another credit card through a balance transfer. Ideally, the new card will have a lower rate than your current ones and/or charge no interest at all for a certain promotional period, such as six to 18 months. Bear in mind that these cards typically impose a one-time fee of 3% to 5% of the amount you transfer, although some will waive that fee.
Another strategy is to roll some or all of your existing loan debts into a debt consolidation loan with a lower interest rate from a bank or credit union. These loans often take the form of a personal loan, but if you own a home and have built up enough equity in it, you can also use a home equity loan for the same purpose. Home equity loans have relatively low interest rates, compared with other types of credit. However, they also require you to put up your home as collateral, so you run the risk of losing it if you’re unable to keep up with the payments.
The Emotional Factor
This decision isn’t all about dollars and cents, however. In the earlier example, a reasonable person might use their $5,000 to pay their mortgage off faster instead of investing in a CD if they know that owning their home free and clear would make them happier. Many retirees, for example, take great comfort in not having to deal with a mortgage bill every month.
Warning
Bear in mind that some kinds of loans have prepayment penalties that kick in if you try to pay them off ahead of schedule. These penalties are most common with mortgages, so it’s worth checking your loan contract or asking your loan servicer.
Go Half and Half
Fortunately, as with many financial matters, this doesn’t have to be an all-or-nothing decision. You could use part of your $5,000 to pay down debt, invest some of it, and even spend a bit if you want to.
You could also split up the money you invest—putting one portion in a vehicle like a CD, money market fund, or high-yield savings account that is very unlikely to lose value, and another into a more speculative but potentially higher-yielding alternative, like an index fund or exchange-traded fund (ETF) that invests in the stock market.
The Bottom Line
Coming into a decent chunk of money, like $5,000, can require some decisions on your part, but that’s a nice “problem” to have. If you have any outstanding debt at the moment, it may make the most sense to use some or all of the money to pay it off. If you have multiple debts, you’ll come out ahead by paying off the costliest ones first.
Putting the money to work by investing would be a smart move if you don’t have any debts or only debts with very low interest rates. You can choose between relatively safe investments or somewhat riskier ones with the potential for a higher return.