Many Americans receive an unexpected sum of money at one time or another. It can be a welcome surprise, but it often comes with complicated decisions.
Some consider using it to relieve long-standing financial burdens such as paying off debts from student loans or credit cards, while others weigh the potential of turning it into something more. The best path isn’t always clear.
💵💰Don’t miss the move: Subscribe to TheStreet’s free daily newsletter💰💵
Popular radio host and bestselling personal finance author Dave Ramsey was recently asked by an advice-seeker about a scenario fitting this description — and he offered some key advice that came with a warning.
“Our daughter is a student, and she has $10,000 in student loan debt. She works part-time, and has a couple of scholarships, but she has borrowed a little along the way to bridge gaps,” explained a man named Gilbert in an email sent to TheStreet by Ramsey Solutions.
Related: Dave Ramsey has blunt words for Americans buying a car
“Her uncle recently sold his business, and he told us he would like to give her a gift of $10,000,” he continued. “We’ve talked to her about this, and we’d like to guide her in the smartest possible direction. Should she begin planning for the future, and use this gift to start investing, or should she use it to pay off her student loans?”
One of Ramsey’s major pieces of financial advice centers around the importance he places on getting out of debt — and finding ways to stay out of debt.
But neither one of the two options for what to do with the unexpected $10,000 windfall being discussed here involve something irresponsible such as taking an unnecessary expensive vacation or buying a lavish sports car.
So getting Ramsey’s view on the best way to handle this fortunate turn of events would be be intriguing.
Image source: TheStreet
Dave Ramsey discusses student loans, investing and debt
Ramsey responded to the individual circumstance being described with a hypothetical thought about investing money in the stock market if no existing debt were present.
“We’ll start by pretending she doesn’t have any student loan debt. In a case like that, would it be wise for her to borrow money on a student loan in order to invest?” Ramsey asked.
“Of course not,” he wrote. “It’s a dumb question, but I want to get you thinking.”
More on personal finance:
- Dave Ramsey offers urgent thoughts about Medicare
- Jean Chatzky shares major statement on Social Security
- Tony Robbins has blunt words on IRAs,401(k)s
Ramsey then summarized that imagined financial activity and the lesson he hoped would be learned from engaging in the thought exercise.
“If you don’t pay off the loans, and invest it instead, it’s just like you borrowed money to invest,” Ramsey wrote.
“See what I mean? That would be a pretty bad plan,” he added.
Related: Dave Ramsey has blunt words on spending money to keep a dog alive
Dave Ramsey sounds alarm on student loan debt
Ramsey bluntly explained his perspective on what he thought the daughter’s financial priority should be in this situation.
“In my opinion, your daughter needs to get her student loan mess cleaned up as soon as possible,” Ramsey wrote. “And this gift from her uncle represents the perfect opportunity to do just that.”
Ramsey emphasized the importance of helping the daughter understand the need to get out of debt with an increasing sense of ugency.
“Listen to me, Gilbert,” he wrote. “The last thing in the world your daughter needs is a big pile of debt waiting on her when she gets out of school.”
“I want her to start investing at some point down the road, but she’s just not in a good position to be an investor right now,” he added. “She needs to pay off all those student loans. I’m talking about wiping out all that debt the minute she gets this wonderful gift in her hands.”
Ramsey closed with some encouraging words of advice.
“And the second after she pays off those student loans, she should get to work on saving a pile of money, so she can complete her studies without racking up any more debt!” he wrote.
Related: Jean Chatzky sends strong message on buying vs. leasing a car
