Should I Use My Investments to Pay Off Debt?

Paying off debt can feel like a slog—cutting back on nights out, packing your lunch, maybe picking up extra hours. And while those choices absolutely help, there may be another way to speed things up.

Before you cash anything out, let’s define what we mean by a nonretirement investment.

What Are Nonretirement Investments?

Nonretirement investments are assets you own outside of tax-advantaged retirement accounts like a 401(k), 403(b) or IRA. You may have inherited a CD from your grandma (that’s certificate of deposit, not a music album) or gotten savings bonds from your uncle as a Christmas present (gee, thanks?). Maybe you jumped on the Bitcoin bandwagon or maybe you trade stocks online in your spare time. These are all examples of nonretirement investments.

Nonretirement investments include:

• Certificates of deposit (CD)
• Savings bonds
• Precious metals (gold, silver)
• Cryptocurrency (Bitcoin, NFTs)
• Single stocks
• Real estate
• Any investment account that is not a retirement account

Some of these can be great investments—at the right time. For example, investing in real estate is awesome! But you want to actually own your home, instead of letting it own you. That means waiting until you’re debt-free and have a good emergency fund in place before you buy a house. And rental properties can be a great source of passive income—but not until you’ve paid off your own home and can pay cash for your rental property.

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On the other hand, some investment options (like gold and Bitcoin) are never a smart option for long-term wealth building. But no matter what—if you’ve got debt, none of these investments are doing you any favors right now. Your money will go a whole lot further helping you pay off debt than it will sitting in the bank (or whatever imaginary land NFTs live in).

Why Should You Cash Out Nonretirement Investments to Pay Off Debt?

Cashing out nonretirement investments fuels your debt snowball and helps you pay off debt faster. As long as you’re carrying debt, every dollar sitting in an investment account is a dollar that isn’t working toward becoming debt-free.

Investing while you’re in debt is a zero-sum game. Any money you might earn from your investments is pretty much canceled out by the interest you’re forced to pay on your debt. Those investments won’t help you increase your net worth if you’ve got a pile of debt that keeps tipping the scale the other way.

So, if you have any money in nonretirement investments, it’s time to throw it all at your debt. That means cashing out your CDs and savings bonds, trading in your gold coins, selling your stocks and crypto, and possibly selling your rental properties or downsizing if you’ve got too much money tied up in real estate. Yeah, it’s kind of a hassle. But depending on how much is in your investments, it could shave months—or even years—off your debt payoff.

Erica, a member of the Ramsey Baby Steps Community Facebook group, did exactly that: “Yesterday I liquidated my taxable brokerage of $22k. Once it clears, I will pay off my student loans of $22k, my last debt.”

Once you’re debt-free and have a fully funded emergency fund built up, you can start investing again by putting 15% of your gross income into good growth-stock mutual funds. Because guess what? You won't have any payments!

How Do You Cash Out Your Investments?

To cash out your investments, sell your nonretirement assets, transfer the money to your checking account, and put every dollar toward your debt snowball.

• Log in to your brokerage or bank account and sell any stocks, CDs or savings bonds you own.
• Check for any early withdrawal penalties on CDs so you know how much cash you’ll receive.
• Sell other assets, like precious metals or cryptocurrency, through the platform or dealer where you hold them.
• Transfer the money to your checking account.
• Put every dollar toward the next debt on your debt snowball list.

It may take a little effort, but it can make a huge difference in your debt payoff. Instead of letting your money sit in investments while debt interest works against you, use it to get out of debt faster.

What Happens If You Withdraw From Retirement Early?

Early withdrawal penalties, income taxes and years of lost compound growth can cost you far more than you’ll save by paying off your debt early.

If you withdraw money before retirement, you’ll owe a 10% early withdrawal penalty plus income taxes on the amount you take out.¹ And if the withdrawal pushes you into a higher tax bracket, you could owe even more. For example, if you withdrew $20,000 from a traditional IRA and landed in the 22% tax bracket, you could end up with only about $13,000 after taxes and penalties. Eh, seems like a bad trade.

The only time we’d tell you to pull money out of your retirement account early is if it would help you avoid a bankruptcy or foreclosure on your home. Other than that, don’t do it!

And listen, the last thing you want to do is take out a 401(k) loan to pay off debt—that’s a huge mistake for several reasons. The main drawback is that if you lose your job, you have to pay back the entire 401(k) loan by the following year’s tax deadline or pay a 10% penalty plus taxes on the loan. Borrowing against your retirement is a bad idea all around.

Bottom line: When it comes to saving for retirement, you’ve got to let compound interest do its thing. And the cost (both up-front and long-term) of taking money out of your retirement account before you retire is simply too much. Plus, there are plenty of other ways to knock out your debt that won’t set you back.

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What Are Your Next Steps to Pay Off Debt?

While cashing out your nonretirement investments is a big way to help you pay off your debt, it doesn’t stop there. Getting rid of your debt takes gazelle intensity. It’s about how much work you’re willing to put in now so you don’t have to worry about debt holding you back later.

That’s where EveryDollar comes in. With our Ramsey budgeting app, you can create a zero-based budget, track your spending, and put every extra dollar toward your debt snowball. No matter where the extra money comes from—your nonretirement investments, a side hustle or just finding more room in your budget—EveryDollar helps you stay focused and make faster progress.