Pay Off Debt Before You Save For Retirement
from daveramsey.com on 01 Jan 2012
Conventional investing wisdom says you must start saving for retirement as soon as you can, whether or not you have debt or an emergency fund. After all, the earlier you start saving, the more time your money has to grow. Plus, you don’t want to leave money on the table by not contributing enough to your 401(k) to receive the full employer match.
While all this is true, it doesn’t take into account the fact that when people hit hard times, they will turn to their retirement accounts to make ends meet if they have no other options.
That’s why Dave takes a different approach with his Baby Steps. He actually tells you to put off retirement savings. It’s advice that goes against everything you’ve ever heard about building a secure retirement—or does it?
One Step at a Time
In Dave’s seven Baby Steps, investing for retirement doesn’t come into the picture until the fourth step:
- Save a $1,000 baby emergency fund.
- Pay off all your debt except your mortgage using the debt snowball method.
- Save an emergency fund equal to three to six months of expenses.
- Invest 15% of your income in tax-advantaged retirement accounts.
Each Baby Step adds to your financial security and helps you lay the foundation to build wealth that will last. For instance, your baby emergency fund allows you to focus on paying off debt. If you have an unexpected expense, your emergency fund will cover it, and you avoid sinking further into the hole.
Then, once you’re debt-free, you can concentrate on saving up a fully funded emergency fund instead of making payments. Finally, you’ll be able to use your income—your most powerful wealth-building tool—to make real progress on your retirement nest egg.
Solving Today’s Problems With Tomorrow’s Money
Millions of people try to multi-task and work towards these goals all at once. They pay on their debt, try to save a little for emergencies, and contribute a bit to their 401(k)s all from the same paycheck. Not only does that slow their progress, it also leaves them unprepared when unexpected expenses arise.
Forbes recently reported that workers who don’t have an emergency fund are six times more likely to take out a loan against their 401(k)s in an emergency. Back in 2008, when the unemployment rate began to spike, 46% of workers who lost their jobs cashed out their 401(k) accounts altogether.
Your emergency fund acts as a shield to protect your retirement savings when tough times strike. You’re able to manage today’s crisis without stealing from tomorrow’s potential.
Time to Get Gazelle Intense
Don’t get the wrong idea. Just because investing for retirement is fourth on the list doesn’t mean you should take your time getting to it. The more time you have to save for retirement—once you’re debt-free with emergency savings in the bank, of course—the more wealth you can build.
Work through the Baby Steps as quickly as you can so you can get started on Baby Step 4. And remember, there are three more Baby Steps after that! Believe us, you want to get to Baby Step 7: Live and give like no one else!
Consult a Professional to Calm Your Concerns
Everyone worries about having enough saved for retirement. If you’re concerned that putting off investing will jeopardize your security, talk with a financial advisor who can answer your questions and crunch numbers until you have a plan you can feel confident about.
We can put you in touch with a financial advisor Dave recommends in your area today!