Don’t listen to Dave Ramsey’s advice if you’re hoping to build wealth.
- Dave Ramsey has offered some great financial advice over the years.
- But he also made some suggestions that people might not want to follow.
- If you stop saving for retirement because you’re paying down debt, you could end up missing out on opportunities to earn employer contributions and save as much as you can for a comfortable retirement.
Dave Ramsey is a financial expert and has given some great advice on various financial topics. But he also made some suggestions that many people should think carefully before following. For example, he suggests abandoning credit cards, but that would mean giving up the opportunity to build credit and earn bonuses. He also suggests opting for a 15-year mortgage when many people would be better off with a 30-year loan.
But while there’s room for disagreement over these proposals, there’s one piece of advice Ramsey has given that could be really dangerous if heeded. Here’s what it is.
Don’t take this advice from Ramsey if you want to build wealth
Dave Ramsey’s most dangerous advice relates to how you prioritize what you do with your money. Specifically, Ramsey said, “If you’re paying off debt, you should pause all contributions to your pension.”
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Ramsey believes you should prioritize paying off debt over saving for retirement so you can make more progress on your debt, faster. “Postponing the pause is the best way to get rid of that chain so you can invest even more in your future,” he said.
He suggests that if you use all of your excess money to pay off debt, you can free up more money to invest later for retirement. “Once you get rid of that debt, you can keep investing at warp speed! You will be really focused and intense and nothing will stop you from where you need to go!”
Why is this advice so dangerous?
Ramsey’s advice on pausing retirement planning isn’t advice most people should follow — especially since he thinks you should pay off almost all of your debt before switching back to retirement planning (with the possible exception of mortgage debt) .
However, there are a number of major problems with this advice.
In the first place, if your employer contributes appropriately, a break in retirement provision would mean giving up the opportunity for free money. If your employer matches your contribution, you can get a 100% return immediately no risk. This is a much higher return than you would get if you paid off almost all of your debt. When you pay off a credit card early, your ROI consists only of the interest saved, which is well under 100%.
You never have a chance to reclaim lost employer contributions, while you can always work to pay off your debt. And you also forego tax deductions and potential tax credits (like the savings loan) if you don’t invest. If you don’t contribute to retirement accounts, you won’t be able to claim those deductions again that you would be entitled to.
As if that wasn’t enough, you Also Don’t miss the chance to make compound growth work for you. When you invest, your money starts making money that can be reinvested, allowing your wealth to grow exponentially. But that takes time. If you put off investing for years until your debt is paid off, that will be the case Yes, really It’s hard to make up the difference and end up with as much wealth as you would have had if you’d started earlier — even if you’re serious about saving, as Ramsey suggested.
For example, let’s say you want to end up with a $1 million nest egg. If you started saving at age 30 through retirement and got an average return of 10%, you’d need to save about $506 a month. But if you started saving just 20 years until retirement, you would need to save $1,454.96. You would almost triple the amount you have to invest due to the delay.
So instead of making your life harder, avoid taking Ramsey’s advice. Instead, you should pay the minimum amount due on all your debt, then invest enough to earn the employer surcharge, and then decide how to allocate the rest of your funds based on whether you can achieve a higher ROI by investing your money Bring your money to market brokerage or additional payment of your debts.
This approach is the smartest way to get rich, while Ramsey’s dangerous advice could see you missing your long-term goals.
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