Should You Pay Off Your Credit Cards Before Investing for Retirement? Here's What Ramit Sethi Says

It's definitely advice worth following.

Saving for retirement is something that should be a key focus of yours. Without a solid nest egg, you might struggle to cover your living expenses once you stop working.

Another thing it pays to focus on? Eliminating credit card debt. But if you ask financial guru Ramit Sethi, it could pay to knock out that debt before pumping money into your retirement savings.

Why paying off debt takes priority

The problem with credit card debt is that the longer you carry it, the more money it costs you. That's why Sethi says that you may want to knock out your credit card balances before focusing on funding your nest egg.

Since a high interest rate on your credit cards can tack on hundreds, if not thousands, of dollars to your existing debt, it's almost always worth it to put extra money toward paying off that debt before investing, Sethi told Business Insider. And so while putting money to work in your retirement plan is a smart move, remember that the interest rate charged by your credit cards might well exceed the return you get in your IRA account or 401(k). That's why it pays to put paying off debt first.

How to pay off your credit cards

Sethi has a couple of good suggestions for paying off credit card debt. One is the snowball method, which has you paying off your balances in order of smallest to largest. The second is the avalanche method, which has you paying off your balances in order of highest interest rate to lowest.

You can feel free to choose whichever method works best for you. The debt avalanche method could end up saving you money on interest. But the debt snowball method might be more rewarding, so to speak, because it might lead to results you can see more quickly (for example, making an entire $500 credit card balance disappear as you move on to tackle your remaining balances). It's important to manage and pay off your debt in a manner that works well for you mentally, which is why so many people have more success with the snowball method -- they get to celebrate little wins along the way.

Of course, if you're going to be paying off debt, you'll need money to do so. To that end, put together a budget that maps out your essential bills, and make sure you have room for some money to go toward your credit cards.

At the same time, consider picking up a side hustle to boost your income and get your hands on more money for debt payoff purposes. This is an especially important thing to do if your regular paycheck doesn't leave you with much leftover money -- something a lot of people are experiencing these days due to inflation.

It's a great thing to want to put money away for retirement. But if you have an outstanding credit card balance, it's generally better to knock that out first, and then move on to focus on beefing up your IRA or 401(k).