When you're young and finally landing what feels like a dream job, the excitement of starting to invest and secure your future can be overwhelming. That's exactly where Bobby from Columbia, South Carolina, found himself.
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At just 24, with a new job he considered the best he's ever had, Bobby was thrilled about the opportunity to begin investing and planning for his family's future. He's earning $35,000 a year, with the potential to make up to $40,000 with bonuses and was eager to make the most of it. However, Bobby also had $20,000 in debt –$17,000 in student loans and $2,000 in medical bills – and lived with his parents while his wife stayed home with their almost 3-year-old child.
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Bobby's call to the Dave Ramsey Show was a mix of hopefulness and confusion. He wanted to know how to get his finances in order, especially regarding investments and starting a 401(k). He was ready to take the next step but needed guidance on balancing this with his current financial situation.
Ramsey's response was blunt but practical. "You don't need to start your 401(k). You're broke and in debt," Ramsey said. He immediately shifted the focus away from investing, emphasizing the importance of dealing with debt and building a solid financial base before diving into retirement savings or homeownership.
Ramsey's advice highlights a fundamental financial principle: prioritize high-interest debt over investing. With high-interest debt often costing more than potential investment returns, paying it off is crucial. For instance, if Bobby had credit card debt with a 20% interest rate, this would be far more burdensome compared to the average 10% annual return from stocks or even 6% from government bonds. Tackling debt can provide a higher effective return on investment.
Ramsey advised Bobby to eliminate debt and save before considering investments or homeownership. "You're broke and living with your parents. You need to pile up some money in a savings account and get out of there," Ramsey instructed. His approach involved increasing income, cutting costs, and focusing on savings. He strongly advised against buying a home at this stage, emphasizing that renting is a practical choice while building financial stability.
"You don't go buy a house when you're broke. You are broke and in debt," Ramsey reiterated. Instead, he recommended finding a modest apartment, building an emergency fund, and prioritizing debt repayment.
Once Bobby addresses his debt and saves an emergency fund – ideally three to six months of expenses – he can then start considering longer-term goals like saving for a home. Ramsey highlighted that renting isn't wasting money but rather "buying patience while you're too broke to buy."
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Essentially, Ramsey's advice boils down to building a solid financial foundation: focus on paying off debt, saving an emergency fund, and then, when you're more stable, start investing and saving for bigger goals.
So, if you're in a similar boat as Bobby, remember Ramsey's principles: Get out of debt, save aggressively, and avoid big financial commitments until you're financially secure. It's not always glamorous, but it's practical and effective.
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This article 24-Year-Old Gets Best Job Of His Life And Wants To Invest – But Dave Ramsey Says 'You're Broke And In Debt, Don't Start Your 401(k)' originally appeared on Benzinga.com
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