If you’re on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
Credit Cards
Banks
Brokers
Crypto
Mortgages
Insurances
Loans
Small Business
Knowledge
by Christy Bieber | Published on Sept. 18, 2022
Image source: Getty Images
Don't listen to this advice from Dave Ramsey if you're hoping to build wealth.
Check out The Ascent's best stock brokers for 2022
Dave Ramsey is a finance expert and he’s given some great advice about various financial issues. But he’s also given some suggestions that many people should think carefully before following. For example, he suggests swearing off credit cards, but doing so would mean giving up the chance to build credit and earn rewards. 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 on these suggestions, there’s one piece of advice Ramsey has given that could actually be really dangerous to follow. Here’s what it is.
Dave Ramsey’s most dangerous advice relates to how you prioritize what to do with your money. Specifically, Ramsey said that, “If you’re paying off debt, you should pause any contributions to your retirement.”
Bonus Offer: Score up to $600 when you open this brokerage account
Discover: Best online stock brokers for beginners
Bonus Offer: Score up to $600 when you open this brokerage account
Discover: Best online stock brokers for beginners
Ramsey believes you should prioritize debt repayment over retirement investing so you can make more progress on your debt more quickly. “Pushing 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 devote all your spare cash to debt payoff, you can free up more money to invest for retirement later. “Once you get rid of that debt, you can resume investing at warp speed! You’ll be truly focused and intense, and nothing will be able to hold you back from where you need to go!”
Ramsey’s advice to pause retirement investing is not advice most people should follow — especially since he believes you should repay almost all that you owe before switching back to retirement savings (with the possible exception of mortgage debt).
There are a number of huge problems with this advice though.
First and foremost, if your employer provides matching contributions, pausing retirement investing would mean giving up the chance to get free money. When your employer matches your contribution, you can instantly get a 100% return with no risk. This is a much higher return than you would get by paying off almost all debt. If you pay off a credit card early, your ROI is just the interest saved, which is much less than 100%.
You do not ever get a chance to reclaim any employer matching funds that you have forgone, while you can always work on repaying your debt. And you also pass up tax deductions and potentially tax credits (like the Saver’s Credit) if you do not invest. If you don’t contribute to retirement accounts, you won’t get back the chance to claim these deductions you could have been eligible for.
As if this wasn’t enough, you also miss out on the chance to make compound growth start working for you. When you invest, your money begins making money that can be reinvested so your wealth grows exponentially. But this takes time. If you put off beginning to invest for years until your debt is paid, it’s going to be really hard to make up the difference and end up with as much wealth as you’d have had if you started earlier — even if you get intense about saving as Ramsey suggested.
Say, for example, you want to end up with a $1 million nest egg. If you start saving with 30 years left until retirement and earn average returns of 10%, you’d need to save about $506 per month. But if you started saving with just 20 years left until retirement, you would have to save $1,454.96. You would nearly triple the amount you have to invest due to the delay.
So, rather than making life harder for yourself, you should avoid following Ramsey’s advice. You should instead pay the minimum due on all your debt, then invest enough to earn the employer match, and then decide how to allocate the rest of your funds based on whether you can earn a higher ROI by putting your money in the market with your brokerage firm or paying extra on your debt.
This approach is the smartest way to end up wealthy, while Ramsey’s dangerous advice could leave you short of your long-term goals.
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review The Ascent's best stock brokers for 2022.
Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Related Articles
Best Online Stock Brokers and Trading Platforms
How to Open a Brokerage Account: A Step-by-Step Guide
Best Online Stock Brokers for Beginners
Best Robo-Advisors
Best Online Stock Brokers and Trading Platforms
How to Open a Brokerage Account: A Step-by-Step Guide
Best Online Stock Brokers for Beginners
Best Robo-Advisors
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 – 2022 The Ascent. All rights reserved.
About Author
