Should I save or pay down debt?

If you’ve ever listened to the Dave Ramsey Show then you know he thinks if you have debt then you should stop doing everything else.

In fact, his baby steps recommend that you get ‘gazelle focused‘ – stop contributing to your retirement, sell your car and buy a junker, and I’ve even heard him advice folks to empty their savings to pay down debt. In his view, every penny of available income should go to paying off your debt.

But that kinda grinds my gears. Because listeners get whipped into a ‘pay off debt at all expense’ frenzy thinking ‘ and like crash diets around New Years, suddenly everyone wants to be debt-free in 2 weeks.

And then they make bad choices. So while I respect Dave Ramsey’s views, here are some instances when you should slow down on your debt payment, or better yet stop paying them altogether.

1. When You Have to Tap Your 401K To Do it

Tapping your 401k for any time other thing retirement is usually a bad idea. But withdrawing the money to pay down debt just so you can be debt-free is a really really bad reason.

Not only will you have to pay taxes on a traditional 401k, but you’ll also have to pay a penalty. You could incur some serious losses if you withdraw at the wrong time and it takes away from your financial fitness for the future. 

So you’ll be cracking the retirement now, and then having to use debt to survive later… a lot of good that’ll do.

There are certainly specific instances when raiding your 401k is necessary, but that should be in cases where you need the money to survive, not to ‘feel better’.

2. You’re About To Have A Baby

Kids cost money. I know surprise surprise.

It would be very nice to get out of debt before your baby arrives, but if paying off your debt means you have no money left to save for hospital expenses, diapers or early childcare costs, then you need to put your debt payment strategy on hold until you can secure funds for the new bundle of joy.

All the progress you made paying off your debt will be undone as soon as the hospital puts that delivery charge on your credit card. After you have your baby and have gotten a chance to adjust to the new lifestyle and budget changes, then you can revamp the debt payoff plan.

3. You Have No Emergency Fund

If you start the debt pay off journey with no access to an emergency fund or have to withdraw all your savings to do it, then be prepared to get back into debt as soon as one happens.

Your emergency fund is a buffer for your financial future. It’s there to stop your whole life – and everything you have accomplished so far – from getting damaged because of an emergency. If you don’t have an emergency fund, then make the minimum payments on all your other debts until you can amass some money for emergencies.

And on the topic of emergency funds – Dave Ramsey has coined the $1000 number as a good place to start, but it’s the bare minimum (especially if you have children). In addition to the $1000, you should have an emergency fund that is enough to cover your health AND car insurance deductible because you know what will drag you back into debt super fast? Getting into an accident, needing to buy a car for work but you spent all your cash paying off debt.

4. When You’re Too Far Gone

Let’s face it. Some of us will get into debt way beyond what we can handle. If you are paying more than 50% of your take-home income towards debt, can’t cover your mortgage or don’t have enough money to buy food, then you should sit down and decide if it’s time to make the hard choices.

You might want to conder declaring bankruptcy, voluntarily giving the car back to the bank, selling the house, getting a short-sale, loan modification, foreclosure or some other avenue that will allow you to wipe the debt slate clean. There is no point continuing to dump money into debt payments if the numbers suggest there is no way you will ever get out of it. Or worse, no way you can survive trying to. 

There is no shame or blame in it. Many successful people have declared bankruptcy – Will Smith, Lady Gaga, and Donald Trump (6 times!) just to name a few. Many others have had a foreclosure – especially in the wake of the great recession – and recovered from the credit hit. You just have to know when to hold ’em and when to fold ’em.

5. When Your Debt Is Super Old

Now, I’m not telling you that you shouldn’t pay your debts. You made a contractual agreement to pay them off so honor your agreement and make the payment. But if you haven’t been making payments in the past and have decided to clear up your debts then beware.

You will want to prioritize more pressing debt like car notes, mortgages, and other current debts over an old debt that you haven’t paid on for years (say 5+ years old) which is close to dropping off your credit report.

Making a payment on that old debt will ‘reset the clock’ and make your debt current. It’ll be like a brand new debt wreaking havoc on your credit score all over again and opening you up to collection calls, legal action, etc.

6. Your Debt Is Really Cheap

This one is a tricky one. If you have the funds and the willpower to pay down the debt then do it. No point in dragging it along when you don’t really have to.

But if you don’t have an emergency fund, have insurance, or minimally investing for retirement to get company match, then debt that has a less than 5% interest rate does not require as much vigor to pay down. You can work on creating a plan to pay down the debt while working on securing the other areas of your financial future.

Debts that usually fall into this category are your home mortgage, car note, and student loans. If your high-interest debt is all cleared up, then taking some time to beef up the back end finances is a great idea before moving continuing the train.

7. You’ll Be In Debt For While

If your debt payoff plan is going to take you over 5 years – and you have cut back on your retirement savings, college savings, and every other type of activity that helps secure your financial future – then you might want to tone it down a notch.

You can be super aggressive with your debt repayment and follow the ‘gazelle focus’ people recommend, but losing 10 years of retirement savings and compound interest will land you debt-free in the present and needing to get debt in the future to support your life. And that’s just your finances.

The extreme sacrifice lifestyle can only be sustained for so long before your quality of life (and that of your family!) is impacted.

There Is No ‘Right’ Path

A lot of folks want you to believe that there is a hard and fast way to financial success. That if you have debt then it should be your primary goal and everything else should fall by the way-side. 

But that’s not true. When it comes to your finances, your situation, goals and values help define what you ‘should’ be doing. That’s why it’s called personal finance because it’s personal.

Just know that you know your situation more than anyone else and just like there are special circumstances, there are also exceptions to the debt pay off rule. Don’t get sucked into making a bad decision out of pressure to get out of debt.

Use that big beautiful brain of yours to track your own path.

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