Here’s Why a Savings Safety Net Is an Illusion If You Have Debt, According to Dave Ramsey
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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In a recent episode of “The Ramsey Show,” personal finance experts Dave Ramsey and Rachel Cruze responded to a caller torn between two common money moves: keeping savings intact or using it to pay off debt.
The caller, like many Americans, was hoping to maintain a financial safety net while still managing his outstanding debt. But Ramsey, known for his blunt stance on debt, didn’t hesitate to call that line of thinking what he believes it is: an illusion. According to him, as long as you’re in debt, you’re not financially safe — no matter how much cash is sitting in your savings account.
Here’s what he had to say and his solution.
To Save or Pay Off Debt
The caller, named Jared, was looking to work on Ramsey’s seven baby steps and had heard the advice to get out of debt as quickly as you can. The problem was, he didn’t want to part with his $16,000 in savings.
His question to Ramsey was whether he really needed to use his savings to pay off debt, asking, “Why does it feel better to have that safety net of the $16,000 than pay off the amount of debt?”
Debt Isn’t Safe
Ramsey empathized with the caller at first, saying “It does feel better to have the $16,000 and have the debt because you have the illusion of security.”
However, he doubled down on a key detail. “You have the illusion that you’re safe, and it’s an illusion because over a 20-year period of time, you’re not safe because you’re broke and in debt.”
His key point is: Even with a hefty savings account, if you’re in debt, you’re not “safe.”
The Mindset Can Keep You Stuck
While Ramsey praised Jared for being “a saver,” which is in and of itself a good thing, he suggested that you can also get into a mindset where saving takes too much priority over paying down debt, keeping you stuck in that “illusion of savings.”
He said that debt is leaving your “financial peace … in other people’s hands.” Creditors can come after you for not paying your debt. You can be sued and lose other assets when you hold debt.
“If something were to happen, there’s other people coming to knock on your door and that doesn’t feel safe either,” Ramsey said
Freedom From Debt Is Security
Instead, freedom from debt, and building back up an emergency fund “gives you a level of deeper security,” Ramsay pointed out.
Start Your Baby Steps
Ramsey’s seven baby steps are his program to pay off debt, save for emergencies and build wealth. They are as follows:
- Step 1: Save $1,000 for your starter emergency fund.
- Step 2: Pay off all debt (except a home) using the debt snowball method.
- Step 3: Save three to six months of expenses in an emergency fund.
- Step 4: Invest 15% of your household income in retirement.
- Step 5: Save for your children’s college fund.
- Step 6: Pay off your home early.
- Step 7: Build wealth and give.
Ramsey’s take is clear: You can’t build true financial security on top of debt. That’s why his baby step plan starts with a $1,000 emergency fund, which is just enough to cover the unexpected, before throwing everything else at your debt.
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Sources
- “The Ramsey Show,” Why Should I Drain My Savings To Pay Off Debt?
