Retirement first, or debt?

Dear Dave,

Should I lower my 401(k) contributions in order to pay off my car and home?

- Jack

Dear Jack,

If you're following my plan, the first thing you should do is set aside an emergency fund of $1,000. That's Baby Step 1. Next comes Baby Step 2, which means paying off all of your debt except for your house. This would include your car. During this time you should temporarily stop any kind of investing and retirement contributions.

Once the only debt left is your mortgage, it's time to move on to Baby Step 3. Now you concentrate on growing your emergency fund to the point where you have three to six months of expenses set aside. Once this is done, you can attack Baby Step 4, which is investing 15 percent of your pre-tax income for retirement. For you, it would mean re-starting the contributions to your 401(k).

The rest of the plan goes like this. Baby Step 5 is putting money into your kids' college funds, while Baby Step 6 is putting everything you can scrape together towards paying off the house early. After that comes the real fun. Baby Step 7 is the point where you simply build wealth and give.

Follow these steps, Jack, and I promise you'll have lots of fun and lots of cash. You'll have financial peace!

- Dave

Dave Ramsey is America's trusted voice on money and business. He's authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.