Savings vs Debt Repayment: The Math
The decision comes down to comparing your after-tax savings rate to your loan rate. Paying off debt gives a guaranteed, risk-free "return" equal to the loan's interest rate. Saving earns interest but you pay income tax on those earnings.
After-Tax Savings Rate
After-tax savings rate = Savings rate × (1 - marginal tax rate). At 22% federal tax on a 4.5% HYSA, your effective after-tax yield is 3.51% — lower than many loan rates.
Guaranteed vs. Uncertain Returns
Paying off debt is guaranteed. Savings rates can change. If you have variable-rate debt (like credit cards), consider that rates can rise further. The peace of mind from being debt-free also has value beyond the numbers.
Frequently Asked Questions
Mortgage interest may be tax-deductible if you itemize, which reduces the effective mortgage rate. Compare your effective after-deduction mortgage rate to your after-tax savings rate. In many cases, investing in a low-fee index fund may outperform early repayment.
Credit card APRs of 20–30% are almost always higher than any guaranteed savings rate. Paying off credit card debt first is nearly always the right financial move before considering savings optimization.