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Ramsey is a believer in paying off debt first, but is he right?
- Most people have to make choices about what to do with their money.
- If you have debt to pay off, you may be unsure whether to focus on that or on saving for retirement.
- Dave Ramsey believes paying off debt should be your priority.
If you’re like most people, you can find some extra cash available each month to put toward financial goals — but not necessarily a ton of funds. If that’s the case, you’ll have to make some decisions about what your priorities are.
For many people, their choice is between working on debt payoff or focusing on saving for retirement so they can be prepared for the future. Personal finance expert Dave Ramsey has some advice if you find yourself in this situation — but is he right?
Here’s what Dave Ramsey thinks you should focus on first
According to Ramsey, the best approach to take when prioritizing what to do with your money is to focus on debt payoff first.
In fact, Ramsey not only suggests you become debt free (except for your home mortgage) before saving for retirement, but he also believes you should save an emergency fund with three to six months of living expenses before saving as well.
Ramsey has outlined the path he believes will lead to financial security in his “seven baby steps,” which start with emergency savings and debt paydown. Retirement savings doesn’t come until the fourth baby step, after you’ve paid off all that you owe.
As he explains on his blog, he believes you’ll end up with more wealth this way because you can aggressively pay down your debt and then invest more money later on once you’ve done so. “The best thing you can do for your financial future is ditch your debt so you can free up your income and start building wealth faster,” his blog states.
Should you listen to the finance guru?
While Ramsey’s advice seems to make sense on the surface, and he even does some math on his blog that shows you can end up better off by paying off debt quickly and then switching to retirement savings, there are a few problems with his approach.
First, not everyone can free themselves of debt within a few years, even if they do prioritize debt payoff. If you owe a lot of money, it could take you many years to repay your balances — and during that entire time, you could end up forgoing the chance to earn an employer 401(k) match that provides a 100% return on investments as well as forgoing the opportunity to earn returns that investing can provide.
Even if it doesn’t take you a long time to repay debt, giving up a 401(k) match and tax breaks for investing can be shortsighted. And the opportunity cost of missed investing returns could mean you must invest much more later on to end up with the same retirement account balance.
Consider a better approach
Rather than taking Ramsey’s advice and always focusing on debt payoff first, it can be best to take a more nuanced approach. You may want to pay off very high interest debt such as payday loans before switching over to retirement savings, but then focusing on investing for your later years instead of paying more than the minimums on debt at a lower interest rate. You can consider the potential rate of return you’d earn investing versus the amount of interest saved to help you decide.
You also don’t have to take an all-or-nothing approach. You can put some of your extra money toward investing for your future — especially to earn tax breaks or employer 401(k) contributions — while still making extra payments on your loan as well.
Ultimately, you should consider what approach you feel most comfortable with, as well as what the costs are of putting off retirement savings, so you can make the choice that’s best for you.
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