I'm wondering how you will have money to do either -- paying off debt or investing.

Step one is to be able to be able to make all your payments (rent, car, food, clothes, debt service). Seems like you are already there...but how much do you have free after making your base payments?

If the answer is "not a lot" -- then you aren't going to accomplish much either way. You need to increase your income and lower your cost of living so that you free up money each month to put to work either on your debt or on your investing.

Step two is setting up an emergency fund. At a minimum this should be three months of your living expenses such that you could lose your income completely for three months and still pay all your bills and buy food.

3 months isn't "Nirvanna" but it's a good target.

Then the next question is the one you are asking. If you are making all your payments....have your safety net....and have money left over each month....then...it depends.

20% credit card type debt is a no brainer....you pay that off before anything else.

5% debt is another matter. You should be able to beat 5% with reasonably low risk investing. If you are making more than 5% with your investments...it's better to invest.

Investment debt is like having employees. You are paying your employees 5% but if they are making 6%, you are earning a profit.

I wouldn't be investing in the 401k just yet either. Your 401k money isn't accessible to you. Invest in a mutual fund or similar investment that will return greater than 5% and not have the strings attached to it that a 401k.

Unless....your 401k contributions are matched 100%. You can borrow up to half your 401k....so if your money is matched...you still have access to "your" money, while your employers contribution sits there as "free money".

You have things you'll need to do well before retiring. Buying a house....buying a car...getting married...having kids. Having all your money tied up in a retirement account that you can't touch -- won't help you.

Good luck,

Lee

I found this post when looking for other information on paying off debts and retirement. You can look for debt and retirement on the FDN Solutions blog they have an interesting take on the matter. Here is the link to the post but I also copied the middle paragraph for you to read

With personal savings at an all time low having a plan to live debt free at retirement is very important. You may have a percentage of your income going towards your 401k or other savings plan but you will need to take into account that you will need your expenses to be very low in order to live on your retirement savings. As an example if you are receiving a pension of $2,000 per month when you retire and your bills amount to $3,000 then you will need to supplement that income to keep the lights on. This is where the personal savings will come into play. You can use that money that you set aside every month to help you with the bills and other medical expenses.