What comes first? Retirement or loan payments?

Published: October 25, 2018

Dave Ramsey

Dear Dave,
Do you think I should lower the amount I’m contributing to my 401(k) so I can pay off my house and my truck?
Jamie

Dear Jamie,
If you’re following my plan, the first thing you should do is set aside a beginner emergency fund of $1,000. That’s Baby Step 1. Next comes Baby Step 2, which means paying off all your debt except for your house. This would include your car. During this time, you should temporarily stop any kind of investing and retirement contributions.

Once your mortgage is the only debt you have left, it’s on to Baby Step 3. This means you start saving money and growing your beginner emergency fund into a fully-funded emergency fund of three to six months of expenses. When that’s done, you can attack Baby Step 4 — investing 15 percent of your pre-tax income for retirement. In your case, that would mean re-starting the contributions to your 401(k).

The rest of the plan goes like this. Baby Step 5 is putting money into your kids’ college funds, if you have kids, while Baby Step 6 is putting everything you can scrape together towards paying off the house early. After that comes the real fun. Baby Step 7 is the point where you build wealth and give like crazy.

It may take a little time in some cases, but following these steps will lead you to financial peace!
—Dave

Dave Ramsey has authored seven best-selling books, including “The Total Money Makeover.” The Dave Ramsey Show is heard by more than 13 million listeners each week on 585 radio stations and multiple digital platforms.