“No time to waste money!” 59-year-old with only $40,000 saved asks Dave Ramsey: Pay off your mortgage or save for retirement?
In an episode of The Ramsay Show called “Should I Pay Off My Mortgage or Save for Retirement?”, a caller named Dan from Colorado asked for advice on whether he should prioritize paying off his mortgage or saving for retirement. Dan, 59, shared his own complicated financial history, including running a business for 21 years, getting into a lot of debt, and securing a stable job in retirement.
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Dan's situation is not uncommon. Many people in their late 50s are struggling to pay off debt and save for retirement. Dan's annual household income is about $145,000, and he's reduced his credit card debt from $92,000 to $5,000. But he still owes $206,000 on his mortgage and has only $40,000 saved for retirement.
Well-known financial advisor Dave Ramsey gave Dan a clear plan of action: “Write a check today and pay off your credit cards,” Ramsey advised, emphasizing the need to ditch credit cards and stop relying on debt.
Next, Ramsay recommended building an emergency fund that could cover three to six months' worth of expenses. Dan said he's started saving and has $7,000 set aside. Ramsay suggested he increase that to around $20,000 to create a solid financial cushion.
After securing an emergency fund, Ramsey advised Dan to save 15% of his income for retirement, which equates to about $20,000 per year. “If you save $20,000 to $30,000 a year for 10 years, you'll have somewhere between $600,000 and $800,000 saved,” Ramsey explained, showing how Dan's retirement savings would grow over the coming years.
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Ramsay stressed the importance of being aggressive in paying off the mortgage. By living on a tight budget and putting a large percentage of their income toward the mortgage, Dan and his wife will be able to pay off their debt much sooner than they expected. [thousand dollars] “Then use that money for a year towards the house,” Ramsey suggested, estimating the house could be paid off in about four years.
Finally, Ramsay emphasized the need for disciplined spending and budgeting to achieve financial stability: “You have to stop spending. You can't afford to waste money,” he urged, emphasizing that strict budgeting and taking small steps will lead to long-term financial success.
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When considering whether to pay off your mortgage or save for retirement, several factors come into play: Paying off your mortgage can save you significant interest in the long run, and it can also give you the psychological benefit of being debt-free. For example, a 30-year loan can be paid off in 20 years by paying an extra $188 per month, saving you about $27,216 in interest.
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But thanks to the power of compound interest, investing for retirement earlier can provide higher returns. For example, starting early can allow your investment to grow significantly over time. Consistently investing $10,000 per year with an average annual return of 8% could grow to nearly $2.8 million over 40 years.
For someone like Dan, the decision may depend on his financial situation and goals. If mortgage interest rates are low and he has little savings for retirement, it may be wise to prioritize retirement savings to take advantage of compound interest and the potential of employer contributions to retirement contributions. Conversely, if the psychological benefit of being debt-free is significant and mortgage interest rates are relatively high, it may be beneficial to focus on paying off the mortgage.
Ultimately, a balanced approach may be best for many people. Paying off high-interest debt first, saving for retirement, and making an extra mortgage payment can put you on the path to financial stability and growth. Working with a financial advisor can help tailor this approach to your personal situation to ensure both immediate financial stability and long-term growth.
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The article “No time to waste money! 59-year-old with only $40,000 saved asks Dave Ramsey: Pay off mortgage or save for retirement?” originally appeared on Benzinga.com.
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