You could win $5,000! Enter our giveaway.

Skip to Main Content

Pay Off Debt Before You Save For Retirement

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:

  1. Save a $1,000 baby emergency fund.
  2. Pay off all your debt except your mortgage using the debt snowball method.
  3. Save an emergency fund equal to three to six months of expenses.
  4. 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.

money icon

Get out of debt faster by refinancing your student loans with a company we trust.

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!

Find an Investing Professional

Everyone worries about having enough saved for retirement. If you’re concerned that putting off investing will jeopardize your security, talk with an investing pro.

Find an investing professional in your area today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

Related Articles

debt snowball

How the Debt Snowball Method Works

5 Minute Read | Debt

The debt snowball method is the fastest way to pay off your debt. You'll pay off the smallest debt while making the minimum payment on all your other debts, and gain momentum as each one gets paid off.

Ramsey Solutions  Ramsey Solutions

A pile of cut-up credit cards under a pair of scissors.

How to Pay Off Credit Card Debt

8 Minute Read | Debt

Paying off your credit card debt can be overwhelming. We’ll show you how to pay off your credit cards and give you the right tools to stay out of debt—for good.

Ramsey Solutions  Ramsey Solutions

27 Ways to Get Out of Debt

27 Ways to Get Out of Debt in 2021

10 Minute Read | Debt

Have you hit a wall while getting out of debt? Get back on track with these 27 ideas!

Ramsey Solutions  Ramsey Solutions