A 32-year-old with $45,000 in non-mortgage debt recently called into The Ramsey Show to ask: “Would it be smart for me to open up a Roth IRA now even though I’m still in debt , or should I wait till I get all my debt off of me first?” Host Dave Ramsey quickly advised the caller to focus on the debt first.
“The fastest way to become a millionaire, the fastest way to build substantial investments, is to first get out of debt because your most powerful wealth-building tool is your income,” he said. The caller’s annual income fluctuates between $100,000 and $150,000. Ramsey suggested she work overtime to earn $150,000, and live on $100,000. That $45,000 could be gone in a year.
Separating the Mortgage From Other Types of Debt
The caller also has a mortgage of $255,000, presumably at a reasonable interest rate. The $45,000 includes higher-rate student loans, a car loan and personal borrowing. Ramsey’s advice: “Pay the $45K off and then open the Roth IRA.”
Ramsey was blunt with the caller: “You’ve been a little sloppy. That’s how we got here. That doesn’t make you bad. It just makes you normal, but normal sucks. We don’t want to be normal.”
Every dollar going toward debt payments is a dollar that cannot be invested. Once the $45,000 is gone, the monthly cash that was servicing those loans becomes available to fund a Roth IRA and taxable accounts simultaneously. At her income level, she can contribute up to $7,500 annually to a Roth IRA, but she could also stack additional savings into a brokerage account. She has roughly 30 years of compounding before a traditional retirement age, which should set her up nicely.
$45,000 in Debt Isn’t As Bad As It Sounds
Ramsey’s framework works well for someone in exactly this caller’s position: high income, manageable non-mortgage debt, and a timeline short enough that delaying Roth contributions by one year costs very little in compounding. A 32-year-old losing one year of Roth contributions is a small sacrifice compared to the freedom of eliminating $45,000 in debt payments.
The advice becomes less clean for someone carrying low-interest student loans (say, under 4%) while also having access to an employer 401(k) match. Skipping the match to pay off a 3.5% loan is a guaranteed loss. If this caller has a 401(k) match available, capturing it before aggressively paying off debt is worth running the numbers on.
Overall, the caller is actually in pretty good financial shape when you consider that the average American owes over $105,000 in debt. A 32-year-old with a $150,000 income and the discipline to live on $100,000 is operating in a completely different financial reality than most Americans. The Roth IRA will still be there at 33. The compounding she loses by waiting one year is real but small. But the income she frees up by eliminating $45,000 in debt is permanent.
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