If you are in your mid-to-late twenties, you may be eager and excited to get on track financially.
Before you go ahead and start investing and trying to be all sophisticated, I’m going to suggest you do something else — pay off your debt.
I listened to Mark Cuban talk on the Dave Ramsey show not too long ago and he gave excellent advice — pay off your debt before you invest.
The one reason you should make paying off your debt a priority is risk.
Although it may feel like you’re invincible, you’re not. Bad things happen all the time. Things like storms, disease, financial crises, job loss, just to name a few. Most people think that most tragedies will not happen to them. “So-and-So’s house burned down but that would never happen to me.” Or, “So-and-So has cancer; I can’t imagine that”. Or, “I cannot believe So-and-So lost his job” without ever thinking about how easily it could happen to him or her.
The point is that there is so much in life that you cannot control. If you are financially prepared, you will make everything bad that happens to you easier to handle. Debt gets in the way of securing a strong financial foundation. Getting rid of your debt is the first step toward building a strong financial future. If you have credit card debt, medical debt, car debt, or student loan debt and something happens to you that requires financial resources, your debt is going to grow and you’ll sink further into debt.
Because you don’t know what will happen to you in the future, betting that you’ll be able to pay your debt off over time carries with it great risk (because you don’t know what your life will be like in the future). The best way for you to prioritize your financial future, is to minimize your risk and prioritize paying off your debt.
By paying off your debt, you will simplify your finances. For example, instead of having $5,000 in credit card debt and $15,000 in car debt while having $30,000 in the bank – you could pay off your debt so you have $0 credit card debt and $0 car debt with $10,000 in the bank. If you feel more comfortable with $30,000 in the bank, then focus on rebuilding that liquid emergency fund once your debt is repaid. The point is to simplify your life and be debt free. Now, most people don’t have the $30,000 in the bank, in which case, it’s time to get down to business and create a plan to get out of debt.
- Related: How to get out of debt
My Debt Story
I am no exception. Three years ago I started with $206,000 in student loan debt. Now, my debt is down to just under $120,000. It’s still massive, but it’s going in the right direction.
I look forward to planning my future, including buying a home and building wealth. But I know that the responsible thing to do is to pay off my student loans before I complicate my finances and take on more. Sometimes Dave Ramsey calls this “cleaning up your mess” before moving forward.
I am going to clean up my mess before I move forward, and I encourage you to do the same!
A Final Note!
If you’re ready to pay off your debt but you’re not sure where to start, I recommend reading Dave Ramsey’s The Total Money Makeover. This book will help you create a plan to get out of debt.