Alright, so you’re making a solid, consistent income, but you also have debt hanging around. Now you’re wondering: should you start investing or focus on wiping out that debt first? Maybe it seems logical to go all-in on paying off that debt before even thinking about investing. Or maybe you’ve heard that the earlier you invest, the more you benefit from compound growth, so debt should take a backseat.
The reality? It’s not that simple. It’s about balancing priorities, taking a hard look at interest rates, and finding the most effective path for your specific situation. This article will walk you through a rational, numbers-based approach to structuring your finances so you can achieve both security and growth. At the end of the day, the right plan for you will depend on your own goals, obligations, and timeline. Let’s break it down.
1. Establish Your Emergency Fund
Life has a way of throwing curveballs—injuries, family needs, unexpected repairs. That’s why having a safety net of 3–6 months’ worth of living expenses in a secure, accessible account is essential. Without enough reserves, an emergency might force you to pull from your long-term savings—denting your investment portfolio and putting your long-term financial security at risk.
If you’ve got a family and multiple expenses, you’ll likely feel safer with closer to six months of reserves. But if you’re single, living lean in an apartment, and maybe even commuting by bus, a bit less might do.
By the way, your emergency fund doesn’t all have to be in cash—some can sit in treasury bills or money market funds. That way, you can still benefit from potentially higher interest rates to help offset inflation. Just ensure you have enough in liquid cash for immediate needs, and if more is required, you can tap into the rest within a day or two.
2. Tackle High-Interest Debt
Debt with high interest rates—think credit cards, which averaged around 24.62% in the U.S.¹ in October of 2024—can be a serious drag on your finances. When you’re paying high interest, each payment you make sees more of your money going toward interest than reducing the principal balance. And the longer that balance sits, the more it eats into funds you could otherwise invest and grow over time.
Focus on knocking out high-interest debt first, especially anything with compounding interest, like credit cards, since it grows faster than simple interest debt. By clearing high-interest balances, you free up cash flow to direct into savings and investments—money that will actually start working for you rather than against you.
If you’re still unsure of what debt to pay off first, check out our article on debt strategies!
3. Contribute to Your 457(b) Retirement Plan
Many fire departments offer a 457(b) retirement plan that allows you to invest in a tax-smart way. When you contribute to a traditional 457(b), those contributions reduce your taxable income for the year—meaning you pay less in taxes now, which keeps more of your hard-earned money in your pocket. If your department offers a Roth option, contributions are made with after-tax dollars, so while you don’t get the tax break upfront, you won’t owe taxes on that money when you withdraw it in retirement.
This setup gives you a lot of room to manage your tax bracket both now and in retirement. By balancing traditional and Roth contributions, you can keep your taxable income in check throughout your working years and build a strategy to minimize taxes later on. In other words, it’s a smart move that lets you grow your savings and control your tax situation so you’re not hit with big surprises down the road.
4. Consider a Health Savings Account (HSA)
An HSA is one of the most tax-advantaged accounts you can have. It offers a rare triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Plus, your HSA is yours forever, so even if you lose the ability to contribute to it, you still keep the funds and assets within it.
Depending on your situation, you might even want to put some funds into an HSA before contributing fully to your 457(b). HSAs give you flexibility for covering immediate health expenses while also providing a tax-free cushion for future healthcare costs. That said, consider balancing contributions to both accounts based on your needs—HSAs cover medical expenses directly, while the 457(b) is your workhorse for broader retirement savings.
5. Max Out Your IRA
An IRA is another valuable tool for building retirement savings with tax advantages that complement your 457(b). With either a Traditional or Roth IRA, you can manage tax savings now or in the future, creating a flexible withdrawal strategy that pairs well with your 457(b) plan. This is especially helpful if your 457 plan doesn’t offer a Roth option, as a Roth IRA can bring that tax-free growth component into your retirement portfolio.
We place the IRA after the 457(b) because 457 funds have higher contribution limits and fewer withdrawal restrictions—you can access them if you separate from service or face an approved unforeseeable emergency. That said, keep in mind that if you’re contributing to a workplace plan, your ability to deduct Traditional IRA contributions will depend on your income and filing status. Still, maxing out both accounts where possible sets up a strong, tax-advantaged foundation for retirement.
6. Address Moderate-Interest Debt
Alright, so you’ve set up your emergency fund, knocked out high-interest debt, and built up solid contributions in your 457(b), HSA, and IRA—accounts with the potential to outpace moderate interest rates (unlike the relentless growth of compounding credit card debt). Now it’s time to consider paying off those lower-interest debts.
Moderate-interest debts in the 4% to 6% range—like certain student loans—might seem manageable, but they’re worth tackling now for a couple of key reasons. In years when investment returns are lower, a 5% interest rate can offset your gains, amplifying the effects of inflation. Eliminating these debts brings you a step closer to true financial freedom, putting you on a path where more of your money goes toward building wealth rather than servicing old obligations. Plus, clearing these “quiet” debts offers you more flexibility to pivot, whether that means investing in real estate, changing careers, or simply having more control over your financial future.
7. Invest in a Taxable Brokerage Account
If you’ve maxed out your tax-advantaged options—or if you don’t have access to a 457(b), an HSA, or IRA deductions—consider a taxable brokerage account. A brokerage account still offers valuable tax benefits, like lower capital gains tax rates and the ability to use tax-efficient investments like ETFs.
Plus, unlike retirement accounts, a brokerage account lets you access funds whenever you want, making it a good fit for intermediate goals, whether that’s a second home, educational funds, or legacy planning. Depending on your circumstances, you might even want to start a brokerage account before paying off moderate-interest debt if you lack access to other tax-advantaged accounts.
8. Pay Down Low-Interest Debt (0-3%)
If you’re down to very low-interest debts—think mortgages, certain auto loans, or federal student loans under 3%—congratulations, you’re in a solid financial position. Since these debts have low carrying costs, there’s no rush to eliminate them, especially if you’re able to earn more by investing elsewhere. However, there are still benefits to chipping away at them, especially if you’re focused on financial freedom.
Even though these low-interest debts likely won’t drain your finances like credit card debt, eliminating them will still give you more freedom. Plus, in years of low market returns, a 3% interest rate might even match or exceed your gains after inflation. Ultimately, whether you pay them down depends on your personal preference—either to stay invested or to enjoy the peace of mind that comes with being debt-free. In fact, if being completely debt-free is simply a strong personal value of yours, you can easily bump up low-interest debt a few notches in the order of investing path – as long as you pay off that higher-interest debt first.
In Conclusion
Investing while in debt boils down to comparing the interest rates on your debts with the potential returns on your investments. High-interest debt—like credit cards—will almost always cost more than you’re likely to earn through investments, making it a clear first priority. But once you’re looking at moderate or low-interest debt, the math becomes more balanced, and the decision to pay off debt or invest depends more on your goals and comfort with risk.
The right financial path is highly personal. Maybe for you, it’s all about freeing yourself from debt as quickly as possible, or maybe it’s about maximizing every tax advantage along the way. Either way, this roadmap gives you a balanced approach—helping you move toward financial freedom, whether that’s through minimizing debt, growing your investments, or, ideally, both.
If you’re not sure how to balance investing with paying down debt, click the button below to arrange a meeting with us at Protection Red. We’re dedicated to helping firefighters like you make the most of your hard-earned income, understand your investment opportunities, and plan for a retirement that feels secure.
Sources:
- https://www.investopedia.com/average-credit-card-interest-rate-5076674
