Should I Use My Investments to Pay Off Debt?

Paying off debt can feel like an uphill battle. You’re saying no to vacations, packing your lunch instead of eating out, sticking to your budget, and maybe picking up extra hours or even a part-time job. And trust us, those sacrifices definitely make a difference! But man, wouldn’t it be nice if you had a way to really boost your progress and throw a bigger chunk of money at your debt snowball?

One way to make a big dent in your debt is to use your investments! But let’s be super clear here—we’re not talking about taking money from your retirement accounts. If you’re paying off debt, you should pause any contributions to your retirement so you can put more of your paycheck toward your debt. But if you’ve already got money in retirement accounts like a 401(k) or a Roth IRA, leave it alone (more on that later)! So, what kind of investments are we telling you to cash out? The non-retirement kind.

What Are Non-Retirement Investments?

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 non-retirement investments.

Non-retirement 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.

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 You Should Cash Out Non-Retirement Investments to Pay Off Debt

Here’s the deal: You shouldn’t be investing until you’re debt-free and have a fully-funded emergency fund. Why? Because you want to make sure you can put food on the table and take care of emergencies when they pop up (and they will pop up) before you start saving for the future. And as long as you’ve got part of your paycheck going to student loans, credit cards or car payments, you can’t truly build wealth. So, if you’re wondering whether to pay off debt or save for the future first, the answer is always pay off your debt.

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. (Use our Net Worth Calculator, and you’ll find out real quick if you’re in the red or not.)

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Think about it this way: Would you take out a student loan to invest in a mutual fund? Or if you had a paid-for car, would you borrow against your car to buy single stocks? Of course not! Borrowing money to invest doesn’t make any sense. And that’s basically what you’re doing when you have money sitting in investment accounts but you still have debt. It’s like having a cookie that you want to save for later. But before you can put it in a jar, someone else takes a huge bite out of it. That someone is debt—because debt is a cookie monster. (Anyone else a little angry . . . and hungry?)

So, if you have any money in non-retirement 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, this could be a giant shovel to help you dig your way out of debt faster!

Once you’re debt-free and have your emergency fund built up, you can really start investing—by putting 15% of your income for retirement into good growth-stock mutual funds. Because guess what? You won’t have any payments! You can start putting away more cookies in the jar and actually get to eat those cookies later. Yum!

Why You Shouldn’t Borrow From Your Retirement to Pay Off Debt

Okay, so we’ve talked about using non-retirement investments to help you pay off debt. But why did we tell you to keep your hands off your 401(k) or Roth IRA? Because using your retirement accounts to pay off debt isn’t worth it.

For starters, you can’t take money out of a retirement account without paying a hefty price. You get hit with a 10% penalty for early withdrawal, plus you have to pay income taxes on the amount you took out. And if you take out a lot of money, it may bump you up into a higher tax bracket—which means you’ll have to pay an even bigger percentage to the IRS. So, even if you took $20,000 out of your IRA to pay off debt (and that put you in the 22% tax bracket), you may only end up with about $13,000 after penalties and income taxes. 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 will 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.

Fast-Track Your Debt-Free Journey

While cashing out your non-retirement 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. And when it comes to staying motivated, having good community to encourage you along the way makes all the difference!

With a Ramsey+ membership, you get the knowledge, tools and community you need to destroy your debt fast. Enjoy 20+ hours of money content (including Financial Peace University) to help you learn the proven plan to getting out of debt and saving for the future. Plus (and this is a big plus), you get access to group coaching calls so you can get your money questions answered and hear from others on the same journey as you. Because we all need people to cheer us on!

Ready to accelerate your debt payoff? Go ahead and start your free trial to Ramsey+ today. Because the sooner you’re debt-free, the sooner you can start building wealth!