Yes, you read the title correctly.
Now don’t have a heart attack or wonder who hijacked my blog. You know my heart. I want you to put as much money as you can toward your retirement dream. But there are three times when you should stop (or pause) investing—and only temporarily!
When You Need a Starter Emergency Fund
How much money do you have set aside for those little bumps in the road? According to Bankrate.com, most people don’t have enough in their checking and savings accounts to cover an emergency costing $500 or more. That’s why you need $1,000 in the bank as soon as possible, even if it means putting money in the bank instead of your investments. You’ll add to it later for a bigger safeguard, but $1,000 will work for now.
When You Need to Pay Off Debt
Now, I know what you’re thinking: Shouldn’t I start investing now so the compound interest has a chance to work? Yes and no. You need to start investing early, but only after you’ve paid off all debt except your mortgage. Why? Simple math.
Look at the fine print on that credit card statement. Yeah, that part that requires a magnifying glass to read. Your interest rate on that debt could run anywhere between 12% and 22%. Chances are, you’re paying more interest on those credit cards than the interest you’re earning on your investments.
Remember, interest you pay is a penalty and interest you earn is a reward. Get rid of the debt that makes you pay and you’ll be free to invest that money to earn interest. Can you imagine how much better off you’ll be when that $500 monthly car payment becomes an extra $500 toward your retirement?
When You Need to Beef up Your Emergency Fund
Remember that $1,000 emergency fund? It’ll cover that blown tire or busted water heater, but it won’t cover a big crisis. If you have a 401(k), guess what happens when a big emergency pops up? That 401(k) becomes your emergency fund. And that’s a really bad idea. For a lot of reasons, but especially your retirement future.
Once you have no debt (except your mortgage), you need to increase your emergency fund so that it has three to six months’ worth of expenses in it. Then you can get back to investing. And since you won’t have any debt, can you imagine how much you’ll be able to put away for retirement? The goal to work toward is 15% of your income. That way, you can work on paying off the house early (yes, you can!) and, if you have children, saving for your kids’ college.
Remember, saving for retirement is a marathon, not a sprint. Even if you have to stop midstride to pay off debt and give yourself a solid emergency fund, pausing for a little bit is better than carrying a heavy load of debt and financial insecurity. I want you to bust through that finish line knowing there’s nothing in the way of enjoying your retirement dream!