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This is Rule 9 in my 10 Rules to Eliminate Debt and Change Your Life

Should I pay off debt before investing?

If you are asking this question, let me first say congratulations. This is a very important question to ask ourselves. It is one that usually follows some personal epiphany, and it means you are serious about your long term financial outlook.

Back in 2008 when the economy crashed, the question of whether I should pay off debt before investing entered my mind. I was tired of feeling like I was falling behind and was desperate for a way to catch up.

Investing seemed like a way out.

So why did I choose to pay off debt before investing? While making gains in the stock market would have made me feel happy, they didn’t seem like they would outweigh the negative feelings of owing so much money and the guilt of living a life that my paycheck couldn’t cash.

Why Pay Off Debt Before Investing?

Debt is a negative investment.

It is the opposite of investing.

That makes the act of paying off debt like an investment. In fact, paying off debt is like an investment with a GUARANTEED return.

If you have $20,000 in credit card debt at 10% interest, every time you make a payment you are earning a “return.”

Most types of investing are gambling. They aren’t much different than going to a casino. You can do all the research you want, but you could lose everything without warning.

Paying off debt is a guaranteed win if you are charged interest for carrying it. Please keep in mind that I am generally speaking of consumer debt like autos and credit cards, as well as student loans.

Mortgage debt is a different animal. I probably wouldn’t urge you to pay off your house before funding an IRA.

The Right Answer Isn’t Always the Best Answer

When asking yourself whether to pay off debt or invest, most of the conventional wisdom applies a simple litmus test: if you can earn a higher return from investing than your debt is costing you in interest, you should invest. 

If we were to extrapolate this type of personal finance “advice” to other topics, we would see very short articles like this:

How to Get Out of Debt in Two Easy Steps!

Step One – Stop acquiring new debt.
Step Two – Pay off existing debt.

While the advice is technically correct, it is not helpful to most people. It ignores the behaviors – the why – behind the situation, and simply presents the problem as a simple, linear equation. I feel that this advice is too simplistic, and ignores one of the basic philosophies of Married (with Debt), which is “personal finance is about more than math.”

Like Dave Ramsey says, if you are such a math genius, how’d you get in debt in the first place?

The truth is, money is very powerful. It brought you to debt with its rewards of Stuff. For many, getting out of debt isn’t about just moving some numbers around in the math equation of our finances. It’s about making big changes for big results and often requires a completely new way of thinking.

For me, the negative feelings of being in debt were so powerful that they were the fuel for my debt payoff. Honestly, if I were carrying debt at 10% interest and I KNEW I could earn 15% by investing instead, I would still pay off the debt first.

If you think that is stupid, so be it. You just aren’t as serious about debt freedom as I am. Making a 5% “profit” from my money is not worth being a slave to my lenders.

By paying off debt first, I’m trying to change my life

So now I am forcing myself to be disciplined to make up for the many years when I wasn’t. If you can’t shake the nagging feeling that you could be making a couple hundred bucks extra a year by investing instead, you probably haven’t conquered those urges of self-gratification that got you into your mess in the first place.

By waiting to pay off debt before investing, I am building my character and showing myself that I have what it takes to do what I feel is right, even when my brain is trying to tell me otherwise.

This type of thinking is also why we pay off debts starting with the smallest balance rather than the smallest interest rate. We believe that the psychological benefit of some early victories will propel us forward and give us the momentum we need to win, and that this momentum is more beneficial than the money we’d save if we paid the highest interest rate debt off first.

By paying off debt before investing, I’m building momentum the safe way.

I’m not trying to run before I can walk.


10 Rules to Eliminate Your Debt and Change Your Life

1. Combine Incomes, Finances and Efforts 

2. Spend Less than You Earn

3. Make a Monthly Debt Budget and Live by It 

4Pay Off Debts Smallest to Largest, Regardless of Interest Rates

5. Make Big Changes for Big Results 

6. If You Don’t Need It, Sell It 

7. Save Monthly for Large, Anticipated Expenses

8. Set Aside Some Money for Fun

9. Pay Off Debts Before Investing 

10. The Goal of Work is Retirement