What the Professionals Say (Dave Ramsey vs. Suze Orman)
I am not a financial professional, so I will share with you what a couple financial pros suggest who I really like.*
- Dave Ramsey: Ramsey has a seven-step plan whereby you first save a $1,000 mini emergency fund then you focus on paying off all of your debt except your mortgage. While you are paying off your debt, you do not make any retirement contributions and you do not invest. In short, you have $1,000 in savings and get “gazelle intense” about paying off your debt. Only after all of your debt is paid off do you move on to the next step and build a 3-6 month emergency fund, followed by other steps, including savings for retirement and investing. You focus on one thing at a time using Ramsey’s plan. Learn more about Dave Ramsey’s “baby steps” here.
- Suze Orman: Suze Orman does not suggest doing one thing at a time, like Dave Ramsey. Instead, Orman follows a broader approach that includes saving, investing, and getting out of debt. Orman lives by the rule that you should have at least an 8 month emergency fund in savings and be contributing to your retirement and other investments. In fact, before you focus on getting out of debt, Orman thinks you should save your emergency fund and make minimum debt payments until your emergency fund is complete. Learn more about Suze Orman’s advice here.
*I searched for more than just two people to add, perusing the web to find multiple well-known financial planners to include, but my search fell short. Dave Ramsey and Suze Orman really take the lead when it comes to debt pay off plans. Therefore, I only included these two (both of whom I really like).
Interpreting what the pros say
The bottom line is that financial planners differ in their opinions as to whether you should save while you are getting out of debt.
Dave Ramsey takes a very methodical approach that focuses solely on getting out of debt before fully funding an emergency fund. This laser-like focus is supposed to be so powerful that the debt is paid off faster than if you were saving and paying off debt at the same time. Ramsey relies on The Bible and his strong belief that being in debt makes you “a slave to the lender”, as the old proverb says. Because you become a slave to your monthly payments, it is best to get out of debt as fast as possible and focus on saving and investing after you “clean up your mess” (i.e. after you get out of debt).
Suze Orman isn’t a fan of debt, but she thinks that having an eight-month emergency fund is paramount to almost anything when it comes to your financial health. After you save for the emergency fund, then you should focus on getting out of consumer debt (credit cards, medical debt, etc.). She doesn’t take this approach for car loans or student loans. For car loans, Orman says a three-year loan is acceptable. This would be paid off while you are continuing to save and accomplish your other financial goals. Suze Orman measures your overall financial health by looking at everything. While credit card debt is bad, she doesn’t have a problem with debt as a matter of fact as long as you can afford it and pay it off in a timely manner.
Obviously, Dave Ramsey and Suze Orman are only two financial planners. But the good thing about using these two as an example is the very different opinions you get. That is to say, there is no one right answer as to whether you should save while you are paying off your debt.
15 Factors to Help You Decide What to Do
You should decide for yourself whether you want to save and invest while you are paying off your debt. But you should be sure to make an educated decision.
Here are factors that you should consider when you are deciding whether to save and invest while you are getting out of debt:
- The amount of debt (small or large)
- The type of debt (student loans, credit cards, mortgage, car loan)
- The interest rate on your debt
- How your debt makes you feel (how much does your debt affect your life)
- The amount of income streams you have (one job or more)
- The type of income streams you have (salary, contract work, investments)
- Your job stability in the foreseeable future
- Whether your employer matches (don’t leave free money on the table)
- Your family status (single, married, kids)
- Your health (how your health affects your income)
- Your living situation (renter, owner)
- Your transportation (the health of your vehicle)
- Your long term financial goals
- Anything else that affects your income and debt payoff
- How intense you can become solely focusing on paying off debt versus paying off debt and saving / investing
All of these factors will help you determine whether you want to prioritize paying off your debt or saving first (or doing both at the same time). While I cannot tell you if you should save while you are getting out of debt, I will give you an example of how to make the decision for yourself.
EXAMPLE: Anne is married to Bob and she is pregnant with their first child. Anne and Bob both work full time jobs. Anne’s family has $500 in a savings account, $4,000 in credit card debt and two car loans totaling $15,000. Anne’s husband has $25,000 in student loans. Anne would love to buy a home because she thinks it’s best for a baby to live in a house, not an apartment.
What should Anne do to get in a better financial situation? I would bet that financial advisors would give lots of different advice here. Here’s one example of what Anne and Bob could do. Certainly Anne and Bob should have a lot more in savings with a baby on the way. After they have some money in the bank, maybe 3 months worth or so, they would want to start paying off their credit card debt and car loan debt, according to the interest rates. The best thing that Anne and Bob can do here is get on a written budget because they are not used to being financially responsible (as seen from the fact that they have $4,000 in credit card debt). And while real estate is an investment in the long run, in the short run it costs a lot of money. Anne and Bob should not buy a house until they are out of credit card debt and have at least an eight-month emergency fund and an additional 10-20% to put down for a down payment.
What I do
I started out with $206,000 in student loan debt after graduating from law school in 2011. Now, I have $156,000. In 2015, I plan to pay $1,100 more than my monthly payment of $1,600, for a total of $2,700 / month ($32,400 for the year).
Using the 15 factors above, since I am single without kids or a mortgage and extremely bothered by my debt, I decided to be super intense this year with paying off my loans. I am very intense about repaying my student loans because I don’t like having the student loan debt and want to build wealth and be financially successful. Personally, I really do not like debt. I have to make career decisions based on my debt, because it is so massive, and I worry about it a lot. That said, it makes sense for me to pay off my student loans as fast as possible.
In terms of saving and investing, I contribute $400 / month to a Roth 401k and plan to continue doing that in 2015. I won’t increase this amount because any raise or bonus is going toward my loans. Additionally, I have about almost $10,000 in liquid savings. I am not contributing more to savings because this amount makes me feel secure. I would rather put extra money toward my student loans. In fact, I feel secure at about $5,000, so I may use $5,000 toward my student loans and just keep $5,000 in savings – we’ll see. One factor that makes me hesitate is my car. I drive a 2006 Honda Civic. If anything goes wrong, the cash will be nice.
Whatever You Do, Get Intense and Focus
Whatever you decide to do – whether you pay off your debt first or after you save an emergency fund, or whether you do them both at the same time – remember to get intense and focus on your financial plan. One thing that successful people do really well is focus. If you create a plan and focus on your goal and commitment to financial success (whatever that means to you), you will achieve your goals. This is why I’m slightly inclined to like Dave Ramsey’s advice – it forces you to focus on one thing at a time, which sets you up for success.
Be sure to look carefully at your entire financial picture and create a plan that fits best within your personal situation (using the 15 factors above), and then execute your plan with intensity and focus, putting your financial health above less-important things, like vacations and going out to eat. Be honest with yourself — only you know what is best for you and your family!
What are you focusing on this year – getting out of debt, saving / investing, or both?
What has worked best for you in the past?