Pay Off Debt or Save for the Future?

When money's tight, it can feel like every financial goal is competing for the same dollar. Should you knock out debt? Build your savings? Start investing for retirement?

The answer is simpler than you might think.

Here's how the Ramsey Baby Steps settle the debate.

Should I Pay Off Debt or Save for Retirement First?

Pay off debt first, every time. The Baby Steps put debt payoff (Baby Step 2) ahead of retirement investing (Baby Step 4) on purpose. Once you're no longer sending payments to a lender every month, you can put far more of your income toward building wealth.

The Baby Steps are Ramsey's proven plan for getting out of debt and building wealth. They lay out a clear path for you to follow so you can attack each goal and always know the next right step for your money. Because when you focus your energy on one goal at a time (instead of trying to do too many things at once), you make more progress.

Here are the 7 Baby Steps:

Baby Step 1: Save $1,000 for your starter emergency fund.

Baby Step 2: Pay off all debt (except the house) using the debt snowball.

Baby Step 3: Save 3–6 months of expenses in a fully funded emergency fund.

Baby Step 4: Invest 15% of your gross household income in retirement.

Baby Step 5: Save for your children's college fund.

Baby Step 6: Pay off your home early.

Baby Step 7: Build wealth and give.

We've seen this plan work for millions of people. In fact, while doing research for our Baby Steps Millionaires book, we found that those who reached millionaire status by following the Baby Steps took about 20 years or less to hit the million-dollar mark. (That includes the time it took for them to get out of debt, build up their emergency fund, invest 15% of their income toward retirement, save for their kids' college, and pay off their home early!) Yeah, this stuff works.

So, if you've got any debt (other than your mortgage), your next right goal is simple: Pay it all off. Then you can build your fully funded emergency fund and start saving or investing for your future. Don't worry, we'll explain exactly how to do that in a minute.

But first, let’s run the numbers so you can see that the case for paying off debt before investing only gets stronger.

Why Is It Better to Pay Off Debt Before Investing?

Because every dollar you pay in interest is a dollar that won’t go toward building your future, and as long as you're making payments, you'll always feel behind. Debt is like climbing a mountain with weights tied to your ankles. Ditch the debt, and you free up your income to start building wealth.

That's exactly what happened for Karen from our Ramsey Baby Steps Community Facebook group. At 61 years old, she paid off more than $42,000 in debt in less than a year. Today, she's built a fully funded emergency fund, invests 15% for retirement, and is on Baby Step 6 with a goal of paying off her mortgage before retiring.

As Karen put it: "I'm 61 years young, and I did it! Over $42,000 of debt paid off in just under 11 months! . . . I've since funded my fully funded emergency fund, I'm contributing 15% to my 401(k), and I'm now on Baby Step 6. On track to pay off my mortgage in three years, well before I retire!”

Karen's story shows what's possible. The math shows why it works.

Here's how the numbers shake out if you invest while still carrying debt versus paying it off first (using our Student Loan Payoff Calculator and Investment Calculator).

Invest While in Debt vs. Pay Off Debt First

Let's say two people are 35 years old and both have a $40,000 student loan with a 6.39% interest rate. They each have $500 a month available to put toward their financial goals, but they choose different paths over the next 30 years.

That's a difference of more than $414,000 (not to mention over $47,000 saved in interest)—even though the second person starts investing two years later. Why? Because paying off debt freed up twice as much money to invest for nearly three decades. That's the power of following the Baby Steps in order.

Go ahead and plug your own numbers into our calculators. You may be surprised by how much wealth you can build simply by getting rid of debt sooner.

How Do I Pay Off Debt Fast?

The fastest way to pay off debt is with the debt snowball method. List your debts from smallest balance to largest (ignoring the interest rates) and attack the smallest one first.

Like a snowball rolling downhill, your momentum grows with every debt you eliminate—and those quick wins help you stay motivated all the way to the finish line.

A budget, like the one in EveryDollar, shows you exactly where that extra money is hiding each month so you can throw even more at your debt.

Debt-Free Date Calculator

How Do I Start Saving for Retirement After Debt?

Once you're debt-free and have a fully funded emergency fund (Baby Step 3), it's time for Baby Step 4: Invest 15% of your gross household income for retirement.

Start with your employer's 401(k), if you have one, and invest up to the match. Then move to a Roth IRA and invest the rest of your 15%. If you max out your Roth IRA contributions and still haven't reached your 15% goal, go back to your 401(k) and contribute more there! (Sidenote: If your employer doesn't offer a match on your 401(k) contributions, start by maxing out your Roth IRA.)

However, if your employer offers a Roth 401(k) with a match and you like your investment options, things get a lot easier—you can invest your whole 15% in your workplace plan.

There's no secret trick or magic formula when it comes to investing. If you invest every month, it will add up. In fact, about 80% of millionaires consistently invested in their employer-sponsored retirement plans.¹ It may sound boring, but it works (remember those Baby Steps Millionaires we mentioned earlier)! And if you're still not sure where to start when it comes to investing, one of our SmartVestor Pros will show you.

Get Where You Want to Be Faster

Listen. Your income is your greatest wealth-building tool. When any part of it goes toward paying off the past (aka debt), it can't go toward the future (emergency savings, retirement, etc.). So, take back your income. All. Of. It.

The retirement of your dreams doesn't have to stay a dream. You can retire a Baby Steps Millionaire. And you can have a savings account ready for whatever life throws at you. And you can be debt-free and in control of every single dollar of your income. You just need to follow the steps. In order.

If you're ready to knock out your debt so you can start building wealth, EveryDollar shows you exactly where your money is going so you can make a plan, stick to it, and pay off debt faster.

Start budgeting for free. The sooner you ditch the payments, the sooner you can put every dollar to work building your future.