Should I Pay Off All My Debts First Before I Start Investing?

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Debt sucks.

It’s tough being crushed by debt and not knowing whether you should start investing or getting all of that debt paid off. I mean, that’s why you’re here, right?

Well, don’t worry because I’ve got you covered. In this post, we’re going to go over a few things so that you know what to do with your money going forward.

Today, we’re going to look at:

The answer to, “should I pay off all my debts first before I start investing?”
A quick breakdown of the answer.
5 reasons why I gave you that answer and…
The 10-step guide to pay off all of your debt (as fast as possible).

Alright, so if you’re ready, let’s get to it!

Should I pay off all my debts first before I start investing?

Yes, you should pay all of your debts off first before you start investing. This process of paying off debt should take approximately 1-3 years and should happen as fast as possible. And you should not invest any money at all while you’re paying your debt off.

That debt is ruining your financial future, so it’s got to go. Do whatever you’ve got to do to knock it out as soon as possible. Once your debt is paid, you will build a 3-6 month emergency fund and then start investing 15% of your gross income.

So let’s break this down because there are a couple of things we need to unpack:

Yes, you need to pay off ALL of your debt before investing.
Once debt is paid, you need to build a 3-6 month fully-funded emergency fund.
Once all of that is complete, in approximately 1-3 years, you will start investing 15% of your gross income into your 401(k) or Roth IRA.

So it’s really that simple. But let’s explore WHY exactly you need to pay off your debt before you invest.

Why should I pay off my debt before investing? Here are 5 HUGE reasons

1. debt is ruining your financial future

Debt is horrible. It’s costing you money in interest and it’s taking away from your financial future because you’re in the hole. You owe money and it’s keeping you from really having the financial future that you dream of. That debt is like an anchor. If you don’t have that anchor removed, it’s going to be like running a race with heavy weights tied to your feet. Hard to make progress and it will eventually wear you out and cause you to lose the race. Eventually, it will make you go deeper into debt.

2. it’s only a little bit of compound interest

Yes, compound interest is INCREDIBLY important. I get that and I’m not suggesting that you skip investing forever. No, I want you to invest and I want you to make A LOT of money in compound interest. But debt takes priority. You have to get it paid off before you start taking advantage of investment gains. So crush your debt. You’re only losing out on a little bit of compound interest while you continue to secure your financial future. Think of it like this: the quicker you pay your debt off, the less interest you’ll lose out on.

3. it will motivate you to work harder

Like I just said, the quicker you pay off your debt, the quicker you can start investing. So if you’re itching to invest and don’t like not putting money away, look at this situation and use paying off that debt as motivation. Get it paid as fast as you possibly can so that you can start investing your money and making even more progress.

4. you will be able to invest more and do more

Once your debt is completely paid, you’ll be able to free up a considerable amount of money. Enough to get your 3-6 month emergency fund fully funded and then start investing 15% of your gross income into retirement.

Past that, with no consumer debt, you’ll be able to live a little bit. As long as you stay out of debt, have your 3-6 month fully-funded emergency fund in place, and stay intentional with your money, you can allocate some of your extra money to fun and things you want.

5. Real millionaires don’t do debt

I want you to think about your goals and what you want for your life. Do you want to build wealth or just have a decent chunk of money invested? Well, if that’s the case, then you need to get rid of your debt as fast as possible. Because wealthy people don’t mess with debt.

Real millionaires don’t do debt. Here’s what millionaires do to become millionaires: they stay out of debt, pay cash for things, pay their home off early, and invest steadily over decades into their 401(k), Roth IRA, or other retirement account. That’s how you build wealth and become a millionaire.

Staying in debt throughout your life and investing journey might build you a small nest egg, but nothing compared to what you can really build if you get out of debt, stay out of debt, and invest! If you’re interested in this path, check out the next few sections: my 10-step guide to paying off all debt as fast as possible (so that you can build wealth).

The 10-step guide to pay off ALL of your debt (so that you can build wealth.

Step 1 – Have a BIG reason WHY

If you want to get out of debt so you can start investing, you need to first find your BIG reason WHY you’re doing all if this. I mean, why are you getting out of debt? Just to invest? Just to get out of debt? No, it needs to be bigger than that.

Your reason for this whole new debt-free lifestyle needs to be HUGE. Here’s mine: I’m sick of debt, tired of being broke and having nothing, sick of not being able to afford anything, sick of a negative net worth, my wife and I want to travel one day, I want to help my son go to college without loans, and I want my wife and I to be millionaires by 40 years old.

Those are huge reasons why we’ve gotten out of debt. What’s your BIG reason WHY?

Step 2 – Stop borrowing money

Getting out of debt is really tough, but it’s impossible if you don’t stop borrowing money. That’s step 2. You have to stop the bleeding and that will require you to stop borrowing money money FOREVER.

So how do you stop borrowing money? It’s simple – you just stop borrowing money. You don’t use your credit card, take out loans, or use financing for anything ever again.

You have to start making different decisions with how you spend money. And you have to take debt off the table. Borrowing money is not okay and it’s not the path to paying off debt, investing, and building wealth. If you want to pay off debt, stop borrowing money and continue on to step 3.

For more, check out my guide here: “How to Stop Borrowing Money: 10 Step Guide to a Debt Free Life.”

Step 3 – Financial goals

The very next thing you need to do is write down some financial goals. This is insanely important when it comes to your finances, because if you don’t have any goals, there’s really no point in trying to pay off debt, invest, and build wealth.

Before you start your debt-free journey, you want to create two types of goals:

Short-term: these are goals that can be achieved within a few months or within 1-2 years. For example, building your starter emergency fund, paying off your debt, building a 3-6 month fully-funded emergency fund, saving up to pay cash for a car, or some other goal to tackle over a short period of time.

Long-term: long-term goals include having your finances completely in order within 3-4 years, paying for kids college in cash, and becoming a millionaire.

Step 4 – Create a budget

Finally, let’s get started with a budget. Your budget is super important and will be the way that you track your money while you’re getting out of debt. The budget will help you control every dollar of your income so that you can use it as efficiently as possible.

First, you need to track your expenses for the next 30 days. Find every expense and then start building your budget. If you’ve already started your budget, let’s start to fine-tune it.

If you’re not already, you need to be using a zero-based budget. This kind of budget allows you to control every single dollar of your expenses and it zeroes out your expenses compared to your income (including paying off debt).

Next, create your zero-based budget. Do that now.

If you want more info on the zero-based budget, check out this post: “7 Ways a Zero-Based Budget is the Best Budget for Your Money.”

Lastly, when doing your budget, JUST DO THE BUDGET. You don’t have to be perfect and you don’t have to get it right every single day. You just have to do a budget and try to get better at it every day. You’re going to suck at it but that’s okay. Put the effort in and that will go a lot farther than most.

Step 5 – $1000 dollar starter emergency fund

So the next step is to get your $1,000 dollar starter emergency fund together. That means you need to put together $1,000 dollars in a savings account to have for emergencies while paying off debt. Your $1,000 dollar starter emergency will be huge for when you’re paying off debt and have an emergency. Your $1,000 dollars will cover you for most smaller emergencies while you are in the process of paying off debt.

So, you need to get this funded AS FAST AS POSSIBLE. I’m talking 1 month or sooner. If you already have $1,000 dollars in a savings account, that’s great. Keep that and put any extra money toward your debt.

If you don’t have $1,000 dollars, you need to do anything and everything you can to scrape this money together. Extra money in your budget, cutting expenses for a month, selling EVERYTHING, having a yard sale, getting an extra job, or any other way that you can save up $1,000 dollars. I’m serious…1 month!

For a quick guide on how to build your $1,000 dollar starter emergency fund, check out this post: “How to Create a $1,000 Dollar Starter Emergency Fund in 1 month!”

Step 6 – Get out of debt

Now it’s time to get out of debt. Finally. Completely. And forever. It’s time to get out of debt and never go back. It’s also time to get out of debt so that you can start investing and working toward your financial goals. You ready? Let’s go!

First things first – you need to list out all of your debts, smallest to largest, and then total up exactly how much debt you have down to the penny. That’s how much you’re going to pay off. You also need to set a short-term goal for how long it’s going to take you to pay everything off. Just divide your total debt by how much you think you can pay ($30,000 total debt by $1,500 per month = 20 months). Get your short-term goal and now we’re going to try to beat that goal.

Next, you need to tackle your debts, one by one, starting with the smallest debt. Pay minimums on all of your other debts and attack the little one with a vengeance. Once that debt is paid, move on to the next. Then the next. Then the next. As you pay off your debts, you will add that amount of money into your debt snowball. Your snowball will keep growing as you keep paying off your debt.

Do anything and everything you can to get this paid off as fast as possible. Destroy your debt like your life depends on it – because it does!

For a couple of posts on how to help get out of debt faster, check these two out:

“47 Creative Ways to Pay Off Debt This Year!”

“101 Ways of Creatively Cutting Expenses to Save a Ton of Money.”

Step 7 – 3-6 month emergency fund

Once your debt is paid, it’s time to build up your 3-6 month emergency fund. This needs to be done just like your starter emergency fund and paying off your debt – as fast as possible. A normal 3-6 month full-funded emergency fund tend to be around $10,000-20,000 dollars. That depends on you. But this number will be 3-6 months of your necessary household expenses or what it takes you to run your household (all bills, expenses, and rent/mortgage).

So it’s up to you. If your job is super stable, 3 months of expenses will be fine. If you and your wife are self-employed, you might need 6 months of expenses. Decide now. Is your job stable or highly unstable?

For example, my wife and I both work for the state of North Carolina. We both have steady, stable jobs, I budget every dollar, and I also run multiple websites that bring in a couple thousand extra dollars per month. So that means we will be okay with 3 months. However, if my wife and I were running our own business, and one government shutdown (you know, like the covid shutdowns, for example) could mean no money coming in, you need 6 months of emergency expenses in the bank.

Last, start building your emergency fund up with every extra dollar you can find, including all of that snowball money from having no debt! You should be able to get your fully funded 3-6 month emergency fund done in about 3-6 months depending on how much you need. We got ours done in about 3 months. So get yours done asap!

For a complete guide on how to build a 3-6 month fully-funded emergency fund, check out this post: “How to Create an Epic Emergency Fund With Any Income!”

Step 8 – Invest 15%, Start kids college fund

Investing 15%

Congratulations on paying off your debt and completely fixing your finances! If you’re at this point in your debt-free journey, I salute you. You’ve done well and it’s time to invest.

When investing, you want to put in 15% of your gross income into your 401(k), Roth IRA, or other retirement account that you have. You’ve skipped out on investing up to this point so it’s extremely important to get this started and rolling.

If you’re unsure of how to invest or where to invest, here’s a simple way to go:

Match beats Roth beats Traditional.

If you have a match at work, take advantage of it. If the account is good, just put 15% percent into this account and get the match as well. If the account sucks, take the match only and put the remaining percentage in a Roth IRA. Your retirement account at work might be a Roth. You’ll just have to check. With your work-sponsored 401(k), 403(b), etc, you wont get taxed up front, but you will pay taxes in retirement.

If no match and no Roth in your work-sponsored plan, open up a Roth IRA. Get up with a local financial pro who can set this up for you. With a Roth, you have the opportunity of getting taxes up front so that you don’t have to pay any taxes in retirement.

A traditional 401(k) would be the last option but this isn’t recommended unless your retirement account is amazing (earning 12% percent returns or better). You can do this if you want but there are better ways to invest for retirement.

However, it’s completely up to you. If you’d like to learn more about investing, check out this guide here on RamseySolutions.com.

The College Fund

Saving for your child’s or children’s college fund is very important. You need to be contributing something to this even if it’s only $50 or $100 bucks a month. We’re currently contributing $100 dollars per month every month no matter what to this fund. This should be around $100,000 by the time my son is 18. It may not completely pay his schooling, but I think we’ll be okay.

The amount you put in is up to you. Just put something into a College 529 Plan with mutual funds. Even if it’s not enough, at least you’ve got a start on their education and that’s better than $0 dollars.

Step 9 – Pay extra on mortgage to get your mortgage paid off

Step number 9 in this plan aims at completely paying off your mortgage. Any extra money that isn’t going to retirement, to a 529, or to saving up for something should be used to start paying off your home early.

If possible, try to refinance your home down to a 15-year mortgage (but only if you can get a better rate).

The average millionaire pays their home off in 10.2 years. So where do you stand?

Step 10 – Build wealth and give!

The final step is to build wealth and give. Once your home is paid for, you’ll be able to save, invest, and give like never before. You’ll also be able to spend and have fun with some of that extra money. You still want to continue to be intentional with your money. But it’s okay to buy stuff and go on vacation. Just make sure it’s reasonable, fits into your budget, and you pay cash for it.

Finally

It’s hard to get out of debt. It’s even harder to have to get out of debt before you start investing. But it’s SO important that you get out of debt first before you start up your wealth building journey. Just remember, debt is horrible. You need to rid it from your life so that you maximize your greatest wealth-building tool: your income. Make it your mission to get out of debt so that you can build real wealth. Quit borrowing money, destroy your debt, and then it’s game on, baby!