Money Management

Dave Ramsey recommends pausing 401(k) contributions when you’re trying to get out of debt. Keep reading to learn why this is a bad idea. 

Paying off debt is a good financial goal. If you have credit cards or other high-interest consumer debt, becoming free of these loans should be a top priority. In fact, finance expert Dave Ramsey has actually gone so far as to say that it should essentially be your only priority.

But, the reality is, some of the advice he gives about how you should handle debt payoff is not good advice and you shouldn’t follow it. Here’s why.

Don’t listen to this Dave Ramsey recommendation when it comes to debt payments

Although some of Ramsey’s suggestions for paying off debt can be helpful, like getting a part time job or side gig to bring in more income to send to your creditors, there’s one suggestion he gives that could end up leaving you far worse off. It has to do with how you prioritize debt payments relative to retirement savings.

“Stop investing,” Ramsey said. “Yep, you read that right. And yes, we even mean stop contributing to your 401(k). Right now, you want all of your income to go toward your plan to get out of debt.”

Ramsey believes you should put a pause on your retirement investing until you’ve not only repaid your debt but also saved up an emergency fund. Only when that is done does he recommend saving 15% of your income for retirement.

There are big problems with Ramsey’s advice

Putting a pause on 401(k) investing is absolutely not good advice. In fact, after you make the minimum payments on your credit cards, personal loans, and other debt, contributing some money to your 401(k) should be your top priority except in very rare cases. One example is if you have payday loans, as these could have interest rates as high as 400%, making them a top priority to pay off sooner rather than later.

See, if you do not contribute to your 401(k), you would lose the chance to earn your employer’s matching contributions for that year. Matching contributions are free money. If your employer matches 100% of your contributions up to 4% of your salary, it is giving you $1 to put into your retirement account for every $1 you invest. That’s a 100% return on your investment — well above the interest you’re paying on any debt.

If you miss a year of 401(k) contributions, you won’t get the chance to get those employer matching funds for that year back. The opportunity will be lost forever. You also get tax breaks for 401(k) investing each year. If you miss a year of earning those tax breaks, that opportunity is also gone for good.

Since your 401(k) contribution doesn’t reduce your taxable income by the full amount you put in, you essentially get more than a 100% return when you earn the match. If you invest $1 and are in the 22% tax bracket, it only costs you $0.78 because you’re saving the 22% you’d have paid in taxes. But your employer gives you a full $1 for it when it matches your contributions.

Once you invest, the money also starts growing and you can reinvest those returns and that money will earn returns as well. This is called compound growth, and the more time you give your money to benefit from it, the wealthier you’ll be. If you wait a long time to contribute to a 401(k) as you pay off debt, you could miss out on years of compound growth.

Don’t give up these opportunities. Pay the minimums on your debts, then contribute enough to earn your maximum employer match, then decide whether extra debt payments make sense or not depending on what your interest rate is relative to what your investments could earn. This is the best way to build wealth — rather than focusing on sending every penny to your creditors, as Ramsey suggests.

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The stock market tends to be reactive to economic news like inflation data. Read on to see how that might affect your investments. 

Since the latter part of 2022, many consumers have been impacted by inflation. For some, inflation has resulted in sky-high credit card balances. For others, it’s led to depleted savings accounts.

You’re no doubt aware that inflation has the potential to impact your spending on everything from essentials to leisure. But it also has the potential to impact your brokerage account balance.

The stock market tends to be reactive

Any time there’s economic news, the stock market tends to react. An unfavorable jobs report, for example, could send stock values on a downward spiral because it’s a sign of a not-so-healthy economy. Similarly, inflation data has the potential to impact stock values.

Now, this might seem counterintuitive, but soaring inflation can actually be indicative of a fairly strong economy, because that situation occurs when the demand for goods exceeds the available supply. And high demand tends to ensue during periods when consumers are flush with cash and have money to pump into the economy.

But these days, high inflation readings are more likely than not to send stock values downward. That’s because the Federal Reserve has made it clear that it’s very unhappy about inflation.

The Fed, in fact, has been implementing interest rate hikes since early last year in an effort to slow inflation down. The logic is that if borrowing gets more expensive across the board, consumers will be motivated to cut back on spending. Once that happens, it should narrow the gap between supply and demand that’s been causing inflation to soar.

But aggressive interest rate hikes also have the potential to drive the U.S. into a recession. And that’s why news of surging inflation has the potential to cause investors to see their stock portfolios take a hit.

Will your brokerage account balance go down the next time inflation data comes out?

Each month, the Bureau of Labor Statistics releases its Consumer Price Index (CPI), which measures changes in the cost of consumer goods. In February, the CPI was up 6% on an annual basis. If March’s reading shows a higher rate of annual inflation, it could cause stock values to plunge and for brokerage account balances to follow suit.

The thing to remember, though, is that these hits tend to be very temporary. And so if March’s inflation date isn’t positive, there’s no need to panic. Even if your brokerage account balance declines, it might pick up again in no time.

In fact, this same advice applies any time your brokerage account balance sinks because the broad market has reacted to economic news. If you’re looking at an investing window that’s supposed to span several decades, it never really pays to get too hung up on what your portfolio balance looks like from one day or week to the next. In the long run, you’re likely to recover from these types of blips.

Of course, a higher inflation reading might be bad news for your wallet in general. But for better or worse, that’s something a lot of consumers are just plain used to by now.

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Some millionaires don’t have credit cards, but the majority have multiple. What should the rest of us do? Read on to learn about the options. 

If the media were to be believed, not only does every person of wealth walk around with a wallet full of credit cards, but they all have super fancy credit cards with no limits that they can use to buy yachts or small islands.

As it turns out, this isn’t the case. At least, not for all rich people.

Our study on the credit card habits of folks with net worths over $1 million actually showed that, while most (70%) have two or more credit cards, about a fifth (22%) only have a single card. Even more surprising, a full 9% don’t have any personal credit cards at all. This is compared to nearly a quarter (24%) of people with lower net worths.

So, who has it right? Should you have one card, multiple cards — or no cards?

At least one card is often necessary

In my opinion (which is certainly biased, but not uninformed), it has become almost a requirement to have at least one credit card in good standing. There are a few reasons for this:

Credit: Having a credit card that you use and pay in full each month is arguably the easiest way to build your credit. Since good credit is important for everything from getting an auto loan to applying for an apartment, this makes credit cards a key financial tool.Safety: Credit cards are objectively one of the safest ways to make purchases. For one thing, they have extensive fraud protections built in, including a legal cap on how much liability you have for fraudulent purchases. And even if a fraudster gets your card info, they can’t use it to drain your bank account (unlike a debit card). Plus, you can dispute transactions for services that weren’t rendered or purchases that never showed up.Online shopping: Online shopping is not only here to stay, but it’s growing each year. More than 75% of U.S. consumers shop online. Unless you’re going to trust every website with your debit card (don’t do this!), you’ll need a credit card to make online purchases.Convenience: More and more places are limiting how — or even if — they accept cash. Having a credit card can make in-store shopping significantly more convenient.

Going beyond these basics, having a credit card can also be extremely rewarding. I mean this in the literal sense — rewards credit cards can be extremely lucrative — and figuratively. Many cards come with extra perks that can make your life easier (and save you money).

A case for the one-card wallet

So, we’ve laid out why you need at least one card. Do you need more than one? Well, there’s arguments on both sides of this one. But, for the average person, a one-card wallet can actually make a lot of sense.

For example, if you’re only really interested in credit cards for the convenience and security features, then you probably don’t need to complicate things by adding multiple cards to the mix. Find one card that works for you, ideally from a bank with a good mobile app so you can easily track your purchases and make payments.

And yes, even if you want rewards, you can still get away with a one-card strategy. Look for a cash back rewards card with a good flat rate on all purchases. If it also has a bonus category (or two) that matches your spending habits, that’s even better.

The greatest game: maximizing rewards

While a one-card wallet can work for some folks, if you’re at all interested in maximizing your credit card rewards, then you’re going to need more than one card. No single card on the market is going to provide the best rewards on everything.

How many cards you’ll need will depend on your strategy, lifestyle, and wants.

You could set up a nice system with three or so cards to cover the bulk of your purchases fairly well — without making things too complicated. Many great rewards cards will offer multiple bonus categories that cover common purchases, like cards with both grocery and gas rewards.

Or, if you’re like me, you can go all-in. I have multiple cash back and travel rewards cards with bonus categories that cover pretty much everything I buy. On top of that, I have cobranded cards for the hotels and airlines I use the most. All of this adds up to a card collection in the double digits. (And yes, I absolutely need my spreadsheets to keep track of it all.)

No one-size-fits-all answer

If we saw anything in our study, it’s that even millionaires don’t all do the same thing with their finances. And that’s one of the best (and worst) things about personal finance: it’s personal. While we can — and should — learn from others, there’s no “one right way” for everyone. You get to find what works for you (no matter how many credit cards you wind up collecting).

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Sitting on a bad check? Read on to see why cashing it might hurt you. 

Payment apps like Venmo make it convenient to send and receive money without having to deal with the hassles of writing out or depositing an actual check. But maybe you have someone in your life who prefers to go the old school route by writing out checks. Or maybe some of your family members like to write you a check for your birthday or during the holidays.

Often, the process of depositing a check into a bank account is a smooth one, as is cashing a check. But what if that transaction doesn’t go through?

Believe it or not, in that situation, you’re not just stuck in an awkward spot. You may be liable for fees — even though you weren’t the one who wrote a bad check in the first place.

When you have to pay for someone else’s mistake

Sometimes, people write bad checks not because they’re trying to be shady, but because they simply lose track of their checking account balances. So, let’s say a friend owes you $100 and they write you a check for that sum. If you go to cash or deposit it and it bounces because they only have $40 in their bank account at the time, you won’t be able to get your money. Annoying, right?

But you may be unpleasantly surprised to learn that in that situation, you could end up being charged a fee by your bank for trying to cash or deposit that cash. This is known as a returned check fee, and SoFi says that it could easily cost you $30 or $35 for a single incident. Ouch.

What to do if someone writes you a bad check

If you’ve received a bad check from someone you know and trust, your only move is really to talk to the person who wrote it and explain what happened. For example, say your friend unknowingly wrote you a check for $100 when they insufficient funds in their bank account. In that case, your friend might be quick to offer you an apology — and issue you a new check once their account balance rises.

That said, a good way to avoid landing in a situation where you’re sitting on a bad check is to ask to get paid in cash. Granted, if it’s your 85-year-old grandmother sending your Christmas gift by mail, that may not work. But if a friend owes you money, you can simply state that you prefer to be reimbursed in cash.

Another thing to keep in mind is that you should never attempt to cash or deposit a check from an unknown source. It’s one thing to cash or deposit a check from your credit card company when it owes you money. But if you receive a check from an organization you’ve never heard of, or a person you don’t know, don’t just take the money.

In some cases, you could end up falling victim to a financial scam by trying to cash or deposit that check. And also, knowingly depositing a bad check could put you at risk of being charged with fraud — and proving that you simply made a silly mistake isn’t always so easy.

Meanwhile, if you’re someone who still writes checks, a good practice is to maintain a ledger so you’re tracking those payments. That way, you won’t have to be the person who causes someone else a headache when they go to cash or deposit your check only to have it bounce on them.

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If you are saving for retirement and you have a Roth 401(k) available, Dave Ramsey always recommends putting money into this type of account. Here’s why. 

Picking the right retirement account is complicated. You can invest in a 401(k) with your employer if they offer one, or an IRA you open with a brokerage firm.

But, Dave Ramsey said there’s one retirement account he always recommends you put your money into. He touts the benefits of it, and says it’s the best option if you have it available to you — but is it really that simple?

This is the account Dave Ramsey recommends

For Ramsey, the answer to where you should put your retirement money is simple.

“We always recommend the Roth option if your plan offers one,” Ramsey said, referring to Roth 401(k)s.

Roth 401(k) plans are offered by some employers. Like other 401(k) accounts, signing up for one is simple. You don’t have to pick a broker as you would if you invested in a traditional or a Roth IRA. You sign up to contribute to your Roth 401(k) and you have money taken out of your paycheck and put into a plan your employer has set up. You then pick from a limited range of investments that are available within your account and can set up automatic investments in those assets.

With a Roth 401(k) as opposed to a traditional 401(k), though, you do not get to make your investment with pre-tax dollars. You get no tax savings at all in the year you contribute to the retirement plan. Instead, your tax break is deferred. As a senior, withdrawals are tax-free, whereas with a traditional 401(k), you have to pay taxes on withdrawals.

Ramsey believes this approach is best for most people. “You pay taxes on that money now so you can enjoy tax-free growth and tax-free withdrawals in retirement.”

Here’s why it’s not so simple

Ramsey’s advice seems like it might make sense because tax-free income as a retiree sounds great. But, the reality is, this isn’t a black-and-white decision because a lot depends on what makes sense for you.

In some cases, it’s really hard to invest enough to earn the full amount of matching contributions your employer offers you — and you want to be sure to do that so you don’t leave money on the table. It’s easier to contribute enough if you use a traditional account, since the tax savings you get in the year you make the contributions reduces the cost of investing at the time.

For example, if you want to invest $3,000 to max out your employer match and you’re in the 22% tax bracket, your $3,000 contribution could save you as much as $660 on your taxes. Your take-home income after taxes and account contributions would only be reduced by $2,340. But, if you invested in a Roth 401(k), your take-home income would be reduced by the full $3,000 due to the lack of an upfront tax break.

For some people, this is the difference between being able to earn the full employer match or not — and if that’s your situation, a traditional account would likely be best. If you think you’re going to pay a lower tax rate as a retiree, then deferring your tax savings until later also doesn’t make sense, so a traditional account would be a better bet.

Ultimately, both a traditional and Roth 401(k) can help set you up for a more secure future so there’s no real wrong answer — but it does pay to think a little more deeply about which one to invest in rather than taking Ramsey’s black-and-white advice on this issue.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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