Overcast
70°FOvercastFull Forecast

Get rid of debt before investing in Roth IRA

Published: Saturday, Feb. 22, 2014 1:15 a.m. CDT

Dear Dave,

I went to medical school, and now I have $70,000 in debt. I just started a 3-year residency making about $50,000 a year, while my wife makes $40,000. The student loans represent our only debt. Do you think we should be paying this off or investing in a Roth IRA?

–David

Dear David,

If I were in your shoes, I’d work to pay down the student loans. That means you might never be in a Roth, but there are other things you can invest in and grow wealth.

I realize this might not seem right mathematically, but I don’t always make financial decisions based exclusively on math. Many times, I do things based on changing money behaviors – stuff like paying off debts from smallest to largest, because it actually works. Personal finance is 80 percent behavior, and only 20 percent head knowledge. So, sometimes you have to go with what actually works best overall, in spite of what the technical math shows.

In your case, I think it’s going to be very valuable to have no student loans by the time you complete your residency. With 3 years to go, and living on a $90,000-a-year income, you can do it. Then, when you come through the other side as a full-fledged doctor, you’ll have the great income and be sitting there debt-free. Not a bad place to be, right?

I understand the Roth seems like a pretty good idea right now, but my advice is to stick with becoming debt-free as quickly as possible. Once that’s done, you and your wife will be able to invest, save and build wealth like crazy!

– Dave

Dear Dave,

My wife started working at a pharmaceutical company that gave her a few thousand dollars’ worth of stock. In the past year, that stock has doubled in value. We’ve considered buying more just to see how it does. What do you think about this?

Robert

Dear Robert,

I understand why you guys would be excited, but you’re still looking at a very risky proposition. Any stock that doubles its value in just 1 year is highly volatile. It’s very unusual when things like that happen, and the fact is, it could go down in value just as quickly.

I think you should be completely debt-free, except for your house, and have an emergency fund of 3 to 6 months’ worth of expenses in place before you start any outside investing. You also should make sure that 15 percent of your income already is going toward retirement.

I don’t mind you dabbling a little bit, as long as all the other stuff is taken care of first. But I’d advise you to never put more than 10 percent of your nest egg into single stocks. If you’ve got $50,000 in a 401(k) right now, limit yourself to $5,000 in this area. That way, if the stock tanks and you lose it all, it’s only a small blip on the radar. You’ll still be financially intact and able to retire with dignity.

It would be fantastic if this stock went through the roof and you two made a ton of money. That would be awesome! But make sure you limit the potential for damage by limiting your exposure. Don’t risk the family farm, as they say, to make this play.

– Dave 

Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

Previous Page|1|2|Next Page

More News

 

National video

Reader Poll

Should the United States intensify its attacks on terrorists who belong to ISIS (the Islamic State of Iraq and Syria)?
Yes
No