Dave Ramsey says: Start by tackling car debt, then think about retirement savings

Dear Dave,

My husband and I have paid off all of our credit card debt and are following your Baby Steps plan. We still owe about $40,000 for two cars and our combined income is about $150,000.

Since we have a good income, we thought we would finish our emergency fund and contribute to our IRAs while we finished the car payments. Under the circumstances, is it OK?

– Paola

Dear Paula,

I understand the temptation you face. But there is a power in short-term behavior modification that surpasses the power of mathematics. Stick to the plan and pay for the cars first.

When you’re still on Baby Step 2, you need to stop saving and investing, and tackle your debt with a vengeance. You’ve got a lot of cash wrapped up in cars, and even with all the great work you’ve done, I know it’s probably still a bit difficult to see the light at the end of the tunnel. Such large debts can be daunting.

But I’m afraid you’ll lose your focus and intensity when it comes to getting out of debt if you worry about your emergency fund and set aside for retirement too soon. I’ve seen this happen to a lot of people, and when it does, it can take many years to get rid of all that debt.

You have made great progress and are earning a lot of money. If you stay passionate about deleveraging, those car payments can be forgotten in about a year and a half.

Think about how quickly you can set up that emergency fund and how much money you’ll have freed up for retirement.

Now is the time to roll up your sleeves, go crazy over all that stupid debt, and eliminate it once and for all. You can do it, Paola!

— Dave