I’ve heard many philosophies about which to do first…pay off all debts and then go gang busters with investing, or take a tag-team approach and do both at the same time. Here is the thing, any plan will work if you work it.

While all financial advice is well meaning, we owe it to ourselves to understand what works best for us. I first started investing for retirement right out of college when I was completely in debt!

Did I regret it? Nope!

Actually, I was pleased with my decision. At the height of the Recession of 2008, after all of our cash was wiped out, we needed that money to prevent us from losing everything. That’s often the horrible financial downside for most people—having absolutely nothing to fall back on. We all need a buffer of some sort and to work every day and not have any savings or investments is a total shame.

Now on the flip side, some people have an insane amount of debt and the only way to get rid of it is to throw every penny and dime towards it! This is especially true if you’re carrying high-interest debt which is typical with credit cards, car payments and personal loans.

Age Matters

I also think a person’s age should be a major factor. In your early working years, there is enough time to pay off all debt, build a nest egg and even rebound from a major financial event if needed. In my 20s, my sixties seemed like ions away but now, I am ramping up efforts to prepare for the retired life I want to have.

However, it’s understandable that if you’re within 0 to 10 years of retirement, there are many different factors to consider and consider them you should.

I guess what I’m saying is…OWN YOUR PLAN!

Know your financial situation, your goals, challenges and future objectives so that you are the best decision maker. Openly talk to family, friends, or trusted advisors about debt and investing. Ask what they have done (good and bad) so you can learn and have a clearer idea of what’s important.

Take a look at the chart below from the EPI Analysis, Survey of Consumer Finances data, 2013. It shows a tough reality of the mean retirement account savings of families by age, from 1989 to 2013.

Unfortunately, the majority of American families are not super-savers and we stay in debt much longer than we should. This directly impacts how much we can save towards retirement. We have to start making tough decisions about debt in order to turn over a new leaf.

What Else Should You Consider When Trying to Decide—Pay Off Debts or Invest?


First – You Must Have an Emergency Fund

The key to financial strength is saving money. Saving money is foundational to any financial plan. Without it, any unplanned or unexpected event will derail your investing or debt repayment efforts. So before jumping into either, you must have an established emergency fund.

What is an established emergency fund? It’s a separate account with a minimum balance (aim for at least $1000) that you do not regularly withdraw from to meet your normal expenses. If you’re not comfortable meeting your living expenses and other monthly debts, saving money has to be your first priority.

If you need to start an emergency fund, take a look at this post: 3 Easy Ways to Start Your Emergency Fund.

Know Your Finances

As mentioned earlier, I don’t believe a one-size-fits-all approach should dictate what you do with your money. If you earn an income, you have to master your personal finances. To often I see (and I was taught this too), we earn money to pay bills and anything beyond that is complicated. That approach can no longer work.

If you haven’t already, learn not only the amount of debt you have, but how soon you can pay it off. How does your income compare to others in your industry with similar experience and skills? When was the last time you asked for a raise or negotiated a new salary? Do you know your debt-to-income ratio? Have you ever completed a financial balance sheet or financial statement?

Knowing your finances will help determine if someone else’s financial advice is best suited for you.

Know Your Employer’s Benefits

Most (not all) employers offer employee sponsored defined contribution plans. According to a September 2016 bulletin from the Department of Labor Employee Benefits Security Administration, there are more than 640k contribution retirement plans covering more than 94 million workers and more than 75 million were actively participating! That’s a lot of people!

So in part, employer’s are offering retirement plans. Does yours? If so, do they offer a 401k, a 403b or a pension? Is there profit sharing or are you eligible to buy or earn company stock? Is there a company match in retirement once you’ve worked for a certain length of time? Meaning, if you contribute 4% of your income each year to your retirement account, will they match it with another 4% giving you an annual contribution of 8%?

Can I be extremely direct right now, sometimes we know more about social media and celebrity gossip than we do our own financial business!?

We have to learn and use our employer’s benefits to put us in a stronger financial position than if we didn’t have them.

The same is true for medical benefits including health insurance, health savings accounts (HSAs) and wellness programs. I started contributing to our health savings account when I was pretty sure we couldn’t afford it. I was wrong and now a few years later, I consider it apart of our investments because of its tax savings and investment component. I wrote a post about HSAs here, 5 Reasons You Should Have a HSA.

When searching for a new job, knowing everything you can about the company’s benefits package is just as (if not more than) important as the salary you’re being offered.

Retirement plans, paid time off, medical insurance, paid sick leave, maternity and paternity options, financial literacy, education assistance, and bonus pay are perks many companies are offering to attract top performers. If you don’t ask, you’ll never know, so bring up benefits early in your interview/discovery period to determine which company is the best fit for you.

Do Not Create New Debt

Debt is a destroyer of financial success. The problem is not having debt, the problem is staying in debt! Think about if you graduated from college in your 20s with student loans, credit cards and a car payment. Then in your early 30s before you paid off those debts, you decided to purchase your first home.

Now, you’re in your 30s with a heavy debt burden which probably could have been avoided.

That’s the problem with debt if we don’t change our habits…it keeps snow-balling.

If you’re seriously ready to change your finances, refusing to create new debt is very important. For some people this means giving up the use of credit cards or delaying a new (or new to you) car purchase. It may even mean, putting the new house on hold at least for a while.

I’ve learned that delaying large purchases (especially ones on credit) rarely harms us. No one dies because they didn’t get a new car or because they don’t upgrade from their starter home to a move-up. We may be inconvenienced but we’re not harmed. However, the opposite is definitely true.

I have seen people take on new debt (like a house or a car) when they were already in a ton of other personal debt. Rarely do things get better, in fact they usually get worst especially if unwilling to address your habits.

Delaying anything that creates more payments will make a difference when you’re ready to invest or to get out of debt. In fact, trying to pay off debt while still using your credit cards is like digging yourself out a hole and throwing dirt back in it at the same time.

If we literally saw someone doing this, it would give us pause yet we do this financially for years.

In Conclusion

So that’s my best take on helping you decide which should happen first—pay off debt or invest. I am passionate about both and I have witnessed the up and down sides of both. Personally, I would rarely discourage anyone from getting out debt and I would only caution someone from investing unless they have insane amounts of debt. And let’s be brutally honest, some people have tremendous amounts of debt and they need to throw all energy and force into getting rid of it.

Know yourself, trust yourself, and take action!

Leave a comment about what you have done and what works best for you! I’d love to hear from you.