If you’ve paid any attention to Dave Ramsey’s financial advice, you may be familiar with the Baby Steps:

1) Save for a $1000 starter emergency fund
2) Pay off all debt but the mortgage using the debt snowball
3) Build a full emergency fund worth 3-6 months of expenses
4) Invest 15% of your income for retirement
5) Save for your kids college
6) Pay off your home early
7) Build wealth and give

I want to draw your attention to two of those steps, ones that sometimes get switched around and out of order.  Take a look at Baby Step 2: Pay off all debt but the mortgage using the debt snowball.  Then, see #4: Invest 15% of your income for retirement.

Those are in that order for good reason!  You’ve got to follow the plan in order for it to work well.  Many financial advisers may disagree vehemently on this point, but I firmly believe you should get out of debt before you invest!  I don’t care what they think; I’m debt free and trying to help other people get that way!

Here’s why you should get out of debt before you invest:

Debt freedom means payment freedom.

When you talk about investing a significant portion of your income, most people wonder how in the world they would manage that under current circumstances.  You know the best way to free up significant income?  Get out of debt!  All those debt payments are killing your ability to effectively invest for retirement.

If you have a car payment, you’re driving your retirement.  Significant credit card debt means you’re eating or shopping your retirement away!  Get free from that stuff, and free up your cash flow to build your future, not someone else’s.

Debt free investors are better investors. 

Let’s say Jane Investor has $30k in various debt, not much of an emergency fund, but she’s investing on a regular basis.  Like all of us, Jane will experience a major negative financial event at some point.  How is she going to pay for that?  She may do one or both of the following: She’ll use some sort of debt instrument like a credit card or line of credit, and/or she’ll stop saving for retirement to help pay for the additional cost.  But debt freedom plus an emergency fund destroys the cycle of debt in your life.

When you’re out of debt and have money set aside for emergencies, you can invest without fear.  You can effectively time the market using the power of dollar-cost averaging, investing the same amount every month.  When the car breaks down, you don’t have to stop investing, because you don’t have any other debt and you have money in the bank to handle it.

Being debt free brings a lot of peace.

When you get free from debt, there’s a sense of peace that comes along with it.  You don’t have to worry about “what if” quite as much.  You don’t have to fear a financial crisis.  You don’t owe anyone.

Successful investing for the long term requires a great deal of willpower in the face of market ups and downs.  When the market is going down, you have to resist the temptation to panic and sell out at the worst possible time.  Likewise, you have to resist the temptation to get greedy in an up market.  I would submit to you that having greater peace in your finances will only help you in your quest to be an excellent long-term investor.

Doing too much dilutes the power of your money.

There is so much that we need to do.  We need to save for emergencies.  We need to invest.  We need to pay off debt.  We need to save for college.  We need to save for that car repair.  We need to live!  And we haven’t even touched on travel or fun yet.

When you try to do everything at once (save + invest + pay off debt + etc.) it dilutes the power of our income, and it takes longer to make progress on any one of those objectives.  Attacking goals one at a time will allow you to accomplish each one more quickly than trying to limp along, doing them all at once.

If you’re investing and still in debt, I would actually tell you to stop.  Stop your investing.  Go home, get fired up, and get out of debt!  Not in 10 years, not in 5, but as fast as you can.  When you start investing again, you’ll be more at peace and more effective.

What do you think?  Why should you do debt or investing first?