Don’t Follow This Dave Ramsey Advice About Getting Out of Debt

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Dave Ramsey recommends pausing 401(k) contributions when you’re trying to get out of debt. Keep reading to learn why this is a bad idea. 

Paying off debt is a good financial goal. If you have credit cards or other high-interest consumer debt, becoming free of these loans should be a top priority. In fact, finance expert Dave Ramsey has actually gone so far as to say that it should essentially be your only priority.

But, the reality is, some of the advice he gives about how you should handle debt payoff is not good advice and you shouldn’t follow it. Here’s why.

Don’t listen to this Dave Ramsey recommendation when it comes to debt payments

Although some of Ramsey’s suggestions for paying off debt can be helpful, like getting a part time job or side gig to bring in more income to send to your creditors, there’s one suggestion he gives that could end up leaving you far worse off. It has to do with how you prioritize debt payments relative to retirement savings.

“Stop investing,” Ramsey said. “Yep, you read that right. And yes, we even mean stop contributing to your 401(k). Right now, you want all of your income to go toward your plan to get out of debt.”

Ramsey believes you should put a pause on your retirement investing until you’ve not only repaid your debt but also saved up an emergency fund. Only when that is done does he recommend saving 15% of your income for retirement.

There are big problems with Ramsey’s advice

Putting a pause on 401(k) investing is absolutely not good advice. In fact, after you make the minimum payments on your credit cards, personal loans, and other debt, contributing some money to your 401(k) should be your top priority except in very rare cases. One example is if you have payday loans, as these could have interest rates as high as 400%, making them a top priority to pay off sooner rather than later.

See, if you do not contribute to your 401(k), you would lose the chance to earn your employer’s matching contributions for that year. Matching contributions are free money. If your employer matches 100% of your contributions up to 4% of your salary, it is giving you $1 to put into your retirement account for every $1 you invest. That’s a 100% return on your investment — well above the interest you’re paying on any debt.

If you miss a year of 401(k) contributions, you won’t get the chance to get those employer matching funds for that year back. The opportunity will be lost forever. You also get tax breaks for 401(k) investing each year. If you miss a year of earning those tax breaks, that opportunity is also gone for good.

Since your 401(k) contribution doesn’t reduce your taxable income by the full amount you put in, you essentially get more than a 100% return when you earn the match. If you invest $1 and are in the 22% tax bracket, it only costs you $0.78 because you’re saving the 22% you’d have paid in taxes. But your employer gives you a full $1 for it when it matches your contributions.

Once you invest, the money also starts growing and you can reinvest those returns and that money will earn returns as well. This is called compound growth, and the more time you give your money to benefit from it, the wealthier you’ll be. If you wait a long time to contribute to a 401(k) as you pay off debt, you could miss out on years of compound growth.

Don’t give up these opportunities. Pay the minimums on your debts, then contribute enough to earn your maximum employer match, then decide whether extra debt payments make sense or not depending on what your interest rate is relative to what your investments could earn. This is the best way to build wealth — rather than focusing on sending every penny to your creditors, as Ramsey suggests.

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