I once heard someone refer to those under 30 as being in their stage of acquisitions.  Throughout our late teens and twenties is when we incur the most amount of debt.

Think about it…

• You get your first credit card when you are 18,
• You graduate college with a butt load of student loans,
• When you get your first real job, you buy yourself a shiny new car,
• After working a few years buy a home.
• All that equates to is debt, debt and more debt.

Also after getting a real job, it’s time start saving and investing.  So when do you pay off debts?

If you ask just about any financially savvy person, they’ll tell you, pay yourself first… save, invest, build an emergency fund… you know the story.  But if you ask me, I’d tell you to pay your debts first, then start saving.

I’ll explain my reasoning in a minute, but first I want to make two points of clarification:

1 – When I say pay off your debt first, I am only talking about bad debts… not all debts.  Bad debts are things such as credit cards debts, auto loans or any other depreciable assets for which you are paying interest.

2 – Regardless of how much bad debt you have… if given the option to either pay off debt or invest in matching 401K, you should always chose to contribute to the 401K.  I am a huge advocate of maxing out 401K matching contributions.  It’s like someone giving you money… with no strings attached.  In spite of of how the stock market is performing… you make a guaranteed 25… 50… 100 percent return for just signing up.  (By the way, I have a girlfriend whose employer offers a 200% 401K match.  Shouldn’t we all be that lucky?)

Anyway now that that’s cleared up… we can get back to the pay yourself second, pay your debts first.  I know I may be going against the grain on this one… but just hear me out.

I want to give you an example of why this makes sense…

Alright, say you have a $2,000 American Express bill.  And now that you are rolling in the dough thanks to your first real job, you’ve got an extra $200 per month that you can use to either pay American Express or to sock away in a savings account.  If it were my decision, I’d say pay the debt.  Why? Well, let’s look at the math:

If you pay $200 a month on your AMEX bill, at a APR of 14.99%… you’d be finished paying the bill in 10.5 months… total interest paid $149.95.

In contrast, let’s say you only pay the minimum of $50 dollars a month… it’ll take 10.5.years to pay the bill in full … and total interest paid $1,435.89.

So in essence, you save $1,285.94 in interest by applying the extra $200 to the AMEX debt.

But let’s see how much interest you would have earned if you had put the $200 in a savings account.  If you put $200 a month in your savings account which is paying 2% interest, after 10 months, you would have earned $15.07.

I don’t know about you, but I would much rather forgo the $15.07 in interest earnings in order to save $1,285.94.

See why it makes more sense to pay your debt first?  In the long run, it saves you money, lot of money.