Dave Ramsey: Here’s Why You Can’t Invest and Pay Off Debt at the Same Time
Written by
Gabrielle Olya
Edited by
Brendan McGinley
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Money expert Dave Ramsey has long championed his “7 Baby Steps” as the roadmap to financial freedom. According to his plan, you should pay off all non-mortgage debt and fully fund an emergency savings account before you begin investing.
But a recent question written into “The Ramsey Show” challenged this advice. A 21-year-old named Dean said he had $95,000 in student loans and wanted to start investing now, believing it would benefit his long-term wealth — even if it meant carrying debt until age 30. Here’s why Ramsey said that debt repayment still needs to be the priority.
Why Ramsey Says Debt Must Come First
Ramsey said that while the caller was free to do whatever he wanted, his views on the best way to build long-term wealth are “wrong.”
“Here’s the truth — the probability of you getting out of debt if you don’t focus on it exclusively and with great intensity, and get your little butt in gear, is close to zero,” he said. “If you think you’re going to wander out of this over 10 years, you’re not going to do it. You’re simply not going to do it.”
After working with millions of people to get out of debt, Ramsey said that he has seen firsthand why it’s so important to focus only on paying down your loans.
Debt Repayment Requires Intensity
Ramsey believes that intensity and urgency are key to escaping debt, and that splitting focus between investing and repayment dilutes both efforts.
“You have lots of energy. Go use it. Go get you some money,” Ramsey said. “You have made a mess, and you need to clean up your mess. And the faster you put this in your rearview mirror, the faster the intensity, the higher the probability that you ever build wealth.”
Dragging Out Loan Payments Rarely Works
Ramsey believes that when it comes to paying off debt, there is no middle ground — you’re either all in or you never pay it off.
“The number of people who drag out student loan debt and systematically pay it off over 10 years or 20 years is almost zero,” he said. “They either do nothing and it stacks like cordwood in the backyard, or they get after it and they knock it out fast.”
Instead of putting $9,000 toward his student debt every year for 10 years, Ramsey told the asker to set aside $30,000 to $35,000 every year to pay the debt off within three.
“Clean up your mess,” he said. “And then you’re sitting there, 24 years old, without this thing hovering over you like most broke Americans, walking around with their own spare bedroom for freaking Sallie Mae.”
How Fast Debt Payoff Sets You Up for Wealth
Ramsey said that under his method, the caller will be out of debt by age 24 or 25, which would provide a better outcome in the long run.
“Now you can build wealth really, really fast because you’re used to living on very little and paying off a bunch of debt,” he said. “We can transfer that to living on very little and investing. You’ll probably be a millionaire by the time you’re 35 if you do what I tell you to do.”
The Truth Is Complicated
Reactions to Ramsey were predictably mixed in the comments. While many supported his stance and were outraged at the size of the debt, others pointed out that ignoring an employer match contribution left free money on the table, which would pay down the debt more slowly but compound a bigger amount earlier, potentially yielding much more money in the course of a lifespan.
“This is where I disagree with Dave most,” said user @davidchidester5463. “You have a job with a 401(k) and especially if they match, the 7%-10% annual returns build up way faster than a 4% student loan. Yes you can do both. Put the minimum in to qualify for the match and throw everything else at the debt. Time is on his side. He’s 21.”
Ramsey’s advice focuses on attacking debt from an emotional and holistic stance, regardless of the math. Short periods of intense discipline are a hallmark of Ramsey financial advice, even if, as user @peterfranzjr.1190 pointed out, from a more logical standpoint, it’s about comparing the debt to the likely returns.
“It depends completely on the interest,” they said. “I am glad I did a blend of pay off student loans (ranging from 7%-2.5%) and invested 6%-10% of my paycheck (growing 8%-10%). I chipped away at the highest-percent loans first and once the first one (highest amount) was gone I rolled all the extra payments towards the next highest-percent loan.”
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