Financial guru Dave Ramsey has built a career out of telling people how to get out of debt and build wealth. He insists that you should prioritize paying off debt, including your mortgage.
But there are some financial steps that make sense to take first — ones that Ramsey says should come before paying off your mortgage.
Why Ramsey insists on paying your debt
Ramsey recommends that savers go debt-free for retirement, and that includes paying off your mortgage. Housing is the biggest expense for many people, and taking out a mortgage frees up your savings and income — like Social Security benefits — for other expenses and investments. Fixed costs can also be dangerous if the stock market goes into a correction. Retiring without a mortgage is less stressful than entering your golden years with a balance.
Payday loans are different from other types of credit in that they have lower annual percentage rates (APRs) than high-interest loans, such as credit cards. That’s why it’s important for retirees to carefully consider whether it makes sense to pay off all their debts.
Retirement planning is not a one-size-fits-all proposition. Rushing to pay off a low-interest loan may not make sense for someone who is left behind after saving in their 401(k) and tax-deductible brokerage accounts. Each person has different goals, living expenses and portfolios, and those differences require personalized strategies. You can talk to a financial planner to discuss your next steps or do your own research to build a portfolio that fits your goals.
What you should do before paying off your loan
As you might expect, Ramsey’s firm Ramsey Solutions recommends paying off consumer debt like credit cards and student loans, before focusing on your mortgage. It also says to build an emergency situation so that you can cover expenses for at least three to six months. That way you don’t need to borrow money to cover emergency expenses.
Ramsey also says invest 15% of your retirement income. Retaining the loan instead of paying it off early allows you to build your portfolio faster. It is also very possible to improve the 4% APR if you invest your money in the stock market and other investments. Financial security in retirement is not just about being debt free. It also needs to have a large enough portfolio to keep up with the cost of living. Putting your money to work in the stock market is often a more efficient use than paying off a low-interest loan early.
Ramsey also recommends setting aside money for your children’s college education if you have children. Saving in tax-advantaged 529 plans allows your money to grow in the stock market like money in your 401(k) or individual retirement account (IRA), but especially for saving for education.
